Communications with CAP members during a crisis
A long-term approach underlies all pension programs.
Defined Benefit (DB) plans have a long-term focus because of the nature of their underlying liabilities and funding requirements. Capital Accumulation Plan (CAP) plans (DC or RRSP) are also intended to be managed for the long haul as well. Plan members should be reminded of this long-term approach in unusual and unsettled situations.
The negative impact of COVID-19 on global economies and on business is a concern particularly with respect to the impact on future cash flows and solvency funding requirements. DB plans are faced with low interest rates, resulting in increased solvency liability estimates, as well as significantly lower equity investment value: both contribute to higher solvency funding requirements.
Similarly, CAP members should be encouraged to view the accounts as a personal Defined Benefit (DB) plan where a long-term view is appropriate. CAP contributions and funding are in fact an estimate of the ‘commuted value’ of the savings needed to achieve their retirement income objectives. A ‘DB” approach can therefore be effective way for members to manage their retirement plan and investments.
Reversion to the mean
From time to time, equity markets experience ‘tail risk’ or ‘six sigma’ events which negatively impact equity investments and retirement savings. In the current low interest rate and volatile equity markets situation and, with improving longevity and the risk of inflation, retirees in DC plan or RRSP pension programs may be concerned there will not be enough money in their retirement accounts.
When markets are volatility it may appropriate to remind members of the concept of ‘reversion to the mean’. This theory suggests that asset prices and historical returns eventually will revert to the long run mean or average level of the entire dataset. It can also apply to other things such as economic growth or the average return of an industry. The key is time.
The following is an example of how markets have behaved in past following major corrections. Past market performance however may not be indicative of the future.
Also keep in mind that if the market is down 50% and recovers by 84% it has still not back to the starting point.
Encourage Retirement Planning
Having a financial plan, something to measure your progress against, is critical. Recommending seeking assistance from a professional accountant, lawyer or advisor is often advisable. This will likely encourage plan members to focus on the long-term as well.
Many DB sponsors also provide a RRSP program to their members. In the case of both DB and DC programs monetary incentive programs to encourage plan members to seek professional assistance is an option for sponsors.
CAP sponsors have a greater responsibility for communications than in the case of DB plans. A long -term view should be encouraged with respect to investments, that ties into the inherent member funding (liability).
A CAP sponsor is required to provide investment options and information to help manage investments. This may include performance indicators commonly used by investment professionals such as:
a) different types of retirement vehicles e.g. DC plan RRSPs, TFSA RESP etc.;
b) a choice of investment that accommodate a variety of member situations and needs;
c) descriptions of the investment options;
d) investment performance indicators; and,
e) fee costs.
In addition, there should be information about:
f) statutory requirements including tax issues;
g) issues specific to administering your CAP plan: and,
h) the long-term impact and cost of fees.
Return performance information is essential in effectively managing investments and should include:
a) return performance for 1, 5, 10 and 20 years (or longer if available);
b) associated benchmarks and returns for applicable to each option; and,
c) tracking error, information ratios and possibly other relevant performance indicators.
Given the long-term focus of retirement programs, long-term returns i.e. 20 years or more, and other long-term performance indicators are important. Sponsors should consider adding this type of information if it is not already available.
In addition, a comparison of the performance of each investment option vs. the benchmark plus fees, should also be provided. CAP members should be reminded that it is their responsibility to make use of this information.
CAP members are provided with information and it is their responsibility to make use of it.
Management guru Peter Drucker is quoted as saying that “you can’t manage what you can’t (or don’t) measure.” In other words, won’t know if you are successful unless your objective(s) is defined and tracked. This is applicable to both investments and retirement plans.
Both DB and CAP DB members should be encouraged to have a long-term financial retirement outlook and plan. CAP sponsors and their service providers are required to provide information, education and tools to assist in managing retirement savings. DB sponsors also often provide RRSP programs as part of their pension programs. While communications is critical plan members should be reminded that it is their responsibility to make use of the information.
If members are feeling uncomfortable with what is happening, they should be made aware that managing pension plan and investments is a challenge for seasoned pension and investment industry professionals as well. Reinforcing a long-term view and sticking with a long-term approach has been the approach used in the past and likely appropriate now.
G. Wahl, Managing Director, The Pension Advisor