This document is the first in a series of papers that will set out Aon’s Canadian Points of View with respect to CAPs. This specific document will provide a general overview while subsequent papers will provide in-depth analyses on specific topics.
Around the globe, Aon is helping clients tackle the challenges that come with the growing reliance on Capital Accumulation Plan (CAP) savings. Although regulatory environment, pace of change, and savings program models may vary geographically, the underlying challenges of this market climate remain the same. The shift of risk from the employer and/or government to individual members, low savings rates, a lack of member engagement and/ or understanding, and the impact of increasing longevity on retirement planning all stand as hurdles that need to be carefully managed.
This document is the first in a series of papers that will set out Aon’s Canadian Points of
View with respect to CAPs. This specific document will provide a general overview while
subsequent papers will provide in-depth analyses on specific topics.
The intent of this series is to present Aon Canada’s philosophy as it relates to CAPs. To add,
these papers will provide a focussed outlook that simplifies the complex issues faced by
sponsors and beneficiaries alike.
Canada’s retirement system is built around three main pillars:
- Government administered programs: Old Age Security (OAS), Guaranteed Income Supplement (GIS) and Canada/ Quebec Pension Plan (C/QPP)
- Employer assisted savings plans: defined benefit (DB), defined contribution (DC) and other capital accumulation plans (CAPs)
- Voluntary / personal savings
While government programs represent an important part of Canadians’ income in retirement, our focus in this document will be on employer assisted savings plans. Specifically, we will highlight Aon’s views on optimizing the effectiveness of CAPs and enhancing the experience of members and beneficiaries of these programs.
CAPs may be used for retirement savings, profit sharing, or savings for other financial goals, and are ultimately focussed on the financial wellbeing of the CAP members. Typically, CAPs are tax-assisted savings programs that allow members to make investment decisions between two (three in Quebec) or more options within the plan.
The following are some examples of CAPs that may be offered by employers in Canada:
- Registered defined contribution pension plans or defined contribution components of registered pension plans (DCPPs)
- Group registered retirement savings plans (Group RRSPs)
- Deferred profit sharing plans (DPSPs)
- Tax-Free Savings Accounts (TFSAs)
- In Québec: Voluntary Retirement Savings Plans (VRSPs)
Employers who offer workplace CAPs dedicate financial and other resources to these programs and take on fiduciary responsibility for their oversight. However, Aon’s 2018 Canadian DC and Financial Wellbeing Survey1 results showed that members are not utilizing these programs optimally:
Aon seeks to change the conversation with respect to CAPs by providing a greater focus on improving member outcomes and their overall wellbeing.
Utilizing our understanding of how individuals make decisions to good effect
1. Designing the program
There are a number of key elements that should be considered in the process of designing a workplace CAP, starting with a clear definition and understanding of the plan’s purpose and alignment with corporate philosophy. This will then drive other important design decisions including vehicle choice, contribution and investment structure, and decumulation options.
To align with the plan’s purpose and to support employees’ financial and overall wellbeing, the program should be customized, flexible, and tax efficient, with a clear focus on savings.
As previously mentioned, examples of tax efficient CAP vehicles that may be offered by employers individually or in combination include: DCPPs, Group RRSPs, DPSPs, and TFSAs. These vehicles offer a spectrum of options to provide for financial wellbeing, while the retirement focus varies from very restricted (such as locked-in DCPP accounts that must be used to provide income upon retirement) to very flexible (such as TFSAs, which provide for immediate access to funds without tax consequences).
2. Adopt plan design that promotes personal engagement
Contribution structures should be set with a view to providing long-term outcomes that meet individuals’ current financial and retirement needs.
- Structures should make it easy for members to maximize their savings and understand how saving early will improve their outcome at retirement
- Structures that give individuals the added incentive of more money from their employer if they save more themselves, are highly effective at encouraging savings
- Structures should avoid disadvantaging different employee cohorts
Understanding a plan’s demographics and monitoring individual’s potential outcomes is key to ensuring success. Alongside the absolute level of contributions being key, making the most of every dollar contributed by both the employer and employee to maximize efficiency of savings is vital and achieved by:
- Ensuring that fees are no higher than necessary to deliver good value and good outcomes for individuals
- Maximizing any tax relief and/or government incentives available
A CAP will be more successful if well-integrated with members’ overall financial strategies both before and after retirement
3. Leverage automation and inertia
Plan sponsors and administrators may make every effort to design CAPs that enable personal
engagement, but experience and research indicates that many members will still not take personal responsibility in their plan membership.
In voluntary plans, inertia drives poor outcomes — lack of participation, inadequate contributions, ‘set it and forget it’ investment choice, etc.; however, inertia can be leveraged to drive positive outcomes through automated design features, both pre and post-retirement, such as:
- Auto-enrolment into the plan (with opt out if necessary for consistency with employment contracts, legal requirements or employer philosophy)
- Default contribution rates and automatic escalation where allowed
- Default investment strategies (pre and post-retirement) and automatic rebalancing
- Default decumulation pathways
Recognising the reality of people’s circumstances and finances
4. Promote flexibility and choice
Aon’s research shows that CAP retirement savings are not being optimized. During the accumulation phase, the employer’s engagement strategies must take these realities into account by providing members with continual encouragement and support to save enough for retirement.
One size does not fit all, therefore plans should offer choice and flexibility to empower individuals through:
- A concise outcomes focused investment menu
- Flexible contribution options
- A full range of retirement solutions
Choices should be presented in a way that employees can easily relate to and understand. They should be supported by a structured decision-making framework which should not only help employees make smart financial decisions about their savings but should also promote financial literacy. This will ensure that they are able to make smarter day-to-day financial decisions and therefore are more likely to be able to afford to make personal contributions.
5. Recognize diverse employee needs and perspectives
Everyone engages in different ways at different times. Members will respond best to an experience and message that resonates with them and their own circumstances. Consequently,
- Communications should be personal, short, simple, segmented, targeted, and outcome oriented
- Understanding the plan member population and segmenting them helps focus on individual experience, behavior, and motivations
Plan sponsors should also encourage engagement through a modern user experience aligned with today’s expectations. Plans should utilize technology to:
- Enable individuals to set their own target outcome and track progress
- Use nudges to prompt decisions at key points
- Give frequent reminders to review their retirement position
- Support self-service as far as possible
- Engage in ways that are congruent with individual lifestyles and practices
Smart CAPs recognize that they are only one part of an individual’s broader financial circumstances and should make it easy for them to make good financial decisions.
6. Emphasize financial wellbeing
Financial wellbeing exists within the broader concept of total wellbeing, which also includes physical, social, and emotional wellbeing. We recognize that an individual’s financial circumstances can be highly complex, and that their financial choices are fundamental to retirement success.
Therefore, we need to help plan members make effective financial decisions, about retirement, in the context of their broader financial circumstances.
At Aon we define financial wellbeing as ‘the ability to confidently manage financial life today, while preparing for the future and anything unexpected along the way’. A smart financial wellbeing program works alongside the employerprovided retirement and other benefits through a suitable range of tools, services, communications, and interventions at each stage of an employee’s financial life, both before and through their retirement years.
We summarize the elements of a strong financial wellbeing program into four categories: prepare, plan, protect, and preserve. Specific topics within the ‘Four Ps’ include, but are not limited to, debt management, emergency funds, budgeting, saving, and investing across multiple goals, insurance, and other financial protection, transitioning to retirement and lifetime income solutions.
Bespoke financial wellbeing solutions and tools can generally be categorized as follows:
- Education: basic financial information, workshops, and financial modelling tools
- Advice: employee assistance programs, financial assessment tools, and access to financial guidance/advice or coaching
- Solutions: core financial benefits plus flexible or voluntary benefit options, including insured solutions and flexible CAP contributions and/or investments
Smart financial wellbeing programs help employees learn, assess, and take action through a variety of media including online, on the phone, in person, or in workshops.
7. Focus on guided decumulation pathways
We believe a CAP program will be more successful if members can integrate it into an overall financial strategy both before and after retirement. The transition from working and saving to retired and spending should be gradual, guided, and planned well in advance.
Success in retirement requires an income-oriented approach to decumulation planning and budgeting — an approach that is targeted to individual needs and circumstances. Members need:
- Help in understanding how the lump sum in their retirement account(s) translates into income
- Help in understanding optimal methods in converting savings into income
- To be guided through budgeting for retirement, with an expectation that income needs will vary at different stages of their lives
The need for an investment strategy does not end at retirement. In the transition from accumulation to decumulation, members’ portfolios should gradually change to align with their decumulation plan. An ideal strategy provides members the same value for money (including institutional pricing) and quality they experienced while they were working and saving.
A full range of retirement solutions should be offered to help members transition. These may include access to out-of-plan options such as annuities and rollover plans with preferred pricing. However, we believe that with the continued evolution of decumulation options, such as Variable Payout Life Annuity (VPLA) or Advanced Life Deferred Annuity (ALDA) as referenced in the 2019 Federal Budget, plan members would be best served with these or other types of in-plan solutions. Regardless of approach, options should be clearly communicated to members through a retirement package and accompanied with supporting resources available in a wide variety of media.
Key elements of a guided pathway include:
- Flexibility and financial modelling
- Default pathways to combat member inertia
- Sustainable income and longevity protection
- Modern tools for an engaging user experience
- Reserves for surprise expenditures
- Robust decision-support framework
Make the best use of plan sponsor and pension committee time and budget
Effective governance is an important and necessary ingredient for CAP success. Two important by-products of good governance include:
- Quality assurance: successful outcomes may include improved efficiencies and performance, meeting objectives, and enhanced protection for members/beneficiaries
- Risk management: successful outcomes may include a reduced risk of plan administration errors, investment losses, excessive fees, and exposure to legal liability
Aon believes that the following components are critical for good CAP governance:
The Canadian legal and regulatory environment for CAPs can be difficult to navigate for employers. Fiduciaries, including plan sponsors, administrators and pension committees, should determine where to spend their governance budget and resources to maximize the outcome. Where possible, utilizing Aon’s consulting expertise, market reach and breadth of capability can help alleviate some of this governance burden.
Employers who offer CAPs are often concerned about fiduciary duties that may be imposed by legislation or common law. Good governance can help mitigate the risk of potential legal claims by members/beneficiaries.
The Canadian Association of Pension Supervisory Authorities (CAPSA) has published a number of industry guidelines, some of which are broadly applicable to various types of retirement savings plans. Smart CAP governance encompasses compliance with applicable legislation and consistency with these industry guidelines which are generally viewed as best practices for the operation of these plans.
Focus on improving outcomes for plan members
9. Drive efficient investment design
Investment strategies need to be tailored to the unique and evolving demographic profile of each CAP.
They should address the risks and objectives at each stage of the savings journey through the use of target date fund structures.
In the transition from accumulation to decumulation, plan member portfolios should gradually change to align with their targeted retirement lifestyle while also considering the realities of their financial position.
Strategies should access the full global investment opportunity set to enhance portfolio diversification and efficiency at each stage of the savings journey.
Aon’s approach to building an efficient and effective investment lineup is based on the following core tenets which have a significant bearing on individual outcomes:
- Most CAP participants do not form effective portfolios over a lifetime and likely sacrifice financial outcomes at retirement
- investment option structure has a significant impact on participant behaviour, particularly with the default option selection
- simplicity enhances the likelihood of improved investment outcomes
- investment decisions should be based on accepted theoretical principals and sound empirical data
- transparency of costs and fees and a focus on the value these represent is key
We believe a tiered investment structure, as follows, best represents these core tenets:
Changing the conversation
The way in which CAP success is measured has changed dramatically and is constantly evolving. The importance of non-investment factors such as education, retirement readiness, and total wellbeing to the improvement of plan member outcomes cannot be understated.
Look out for more thought leadership from Aon as we look to change the conversation around CAPs.
1 Aon DC and Financial Wellbeing Employee Survey 2018 (Canada version).
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The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.