Tell a 60-year-old Canadian with a $4,200 per month defined benefit pension that they are sitting on an asset worth close to $1 million, and they might shrug it off as an abstraction. However, offer that same person that lump sum up front, and it is a different story, according to Jeremy Phillips, president and chief executive of Regina-based Plannera Pension and Benefits, which administers Saskatchewan’s Public Employees Pension Plan, the largest defined contribution (DC) plan in Canada.
Phillips noted that when plan members were offered the opportunity to take the cash balance, 90 per cent chose the money and preferred to manage it themselves. This highlights the growing appeal of DC plans as stock market returns have soared in recent years, while more conservative defined benefit (DB) plans have been left behind.
The Shift in Pension Preferences
Defined-benefit plans have long been revered as gold-plated pension perks, reserved for public servants and a shrinking number of private sector workers. However, with the S&P/TSX composite index rising 28 per cent last year and almost nine per cent year to date, DC plan holders are seeing their accounts grow significantly. In contrast, major public pension plans with conservative asset mixes have not achieved such gains.
Phillips explained that when starting with no money, a DB plan looks great for its security and predictability. But once balances grow, members often love DC plans and would be reluctant to change. He questioned whether more Canadians, with employer matches, might prefer DC plans.
Valuing Pensions
Ana Nunes, an actuary and investment professional, said a rule of thumb is that a pension taken at 60 can be worth 18 to 20 times the monthly amount received for life. For a $50,000 annual pension, that could be worth $1 million today. She noted that DB plans tend to favour long-term employees, and people like them because they require little effort.
Phillips pointed out that DC plans are evolving and can offer structures that recreate aspects of security, such as through Variable Payment Life Annuities (VPLAs), which create a DB-like structure within a DC plan and ensure retirees do not outlive their savings. “We will give you a pension for the rest of your life and guarantee you don’t run out of money,” he said.
Investment Strategy Changes
Bernadette Chik, leader of the defined contribution advisory business at Mercer Canada, said a top concern for employees remains covering monthly expenses. She noted that the construction of investments has changed, and DC plans are increasingly including alternatives in their asset mix. Exposure to private markets is allowing participants to retire earlier by achieving higher returns.
While not everyone will embrace defined contribution plans, they offer an opportunity to create personal wealth. As stock markets continue to perform, DC plans are staging a comeback, providing Canadians with more control over their retirement savings.
