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Canada
Toronto, 29 October 2009

When asked to choose the top challenges facing their defined contribution (DC) plans, Canadian sponsors overwhelmingly cited limited member understanding (77%) and poor investment returns (71%), according to Mercer’s 2009 Global DC survey. The survey included 193 Canadian plans among 1,500 responses from 33 countries. 

“Sponsors say they intend to take action to address these shortcomings,” noted Oma Sharma, Mercer’s defined contribution investment consulting leader.

Almost 90% of respondents indicate they are making it a high priority to improve member understanding and education, and just over 50% say they will change investment arrangements to reduce costs and/or improve investment returns over the next two years.

Over half of Canadian plans in the survey have been in place for more than ten years, while those implemented over the last three years represent only 9% of responses.

“Maturing DC plans are staying the course,” noted Jean-Daniel Côté, Mercer’s defined contribution retirement leader.

Few Canadian plan sponsors said they have made, or are planning to make, reductions or suspensions of DC plan contributions. In fact, 92% of respondents say they have decided not to make any changes to DC contributions in the near future, whereas over 20% of their American counterparts report that they have reduced or are planning to reduce company contributions in response to the recent economic downturn.

“This should be reassuring for Canadian DC plan members,” added Côté.

Not surprisingly, three out of four respondents cite the provision of a competitive retirement program in line with the market as the top reason for establishing a DC plan. When asked to identify the top three most important success factors for their DC plans, respondents most frequently cited that the plan should be valued by employees (72%), cost predictability (44%) and benefit adequacy (43%).

“While benefit adequacy is identified as a key goal, close to half of respondents never review projected DC retirement benefits and only 29% identified inadequate pension benefits as a particular concern,” said Côté. “We suggest that a review of projected benefits, especially in light of limited member understanding and poor investment returns, might be a useful exercise for plan sponsors to consider in 2010.”

Investment options

Two-thirds of survey respondents offer between six and 13 investment options to members, and one-third said they are considering the addition of target date funds over the next two years. 

“Canada continues to lag the U.S. in offering these funds,” said Sharma.

The majority of Canadian DC plans have a default fund option in place for members who do not provide investment directions. However, default fund selection varies widely, with 36% of respondents’ plans using a balanced fund, 23% a money-market/short-term fund and 19% a target date fund series.

“This indicates how existing DC plans differ from new ones being implemented”, said Sharma. “New plans are much more likely to use target date funds as the default fund option. The good news is that most DC plan members are making an active investment decision, with two-thirds of survey respondents indicating that fewer than 20% of their DC plan members have defaulted.”

Contribution levels

Contribution levels remain remarkably stable when compared to Mercer’s 2002 and 2006 DC Surveys. The median overall maximum employer contribution for pure DC arrangements is 5% for non-unionized, management plans, and unionized plans, but 6% for executive plans. The median employee maximum contribution for all employee groups is consistent at 5%.

Approximately two-thirds of plans include bonuses in eligible earnings for DC contribution purposes, and over 80% include commissions.

“This is a significant increase from our 2006 survey results,” commented Côté. “It will be interesting to see if this apparent trend to include variable compensation in eligible earnings represents a desire on the part of plan sponsors to more closely link DC plan contributions to business cycles, or if it is simply the result of this particular plan sponsor subset.”

Communication

Half of plan sponsors say they mostly rely on their administrators to provide communication to members. Only 12% indicated they have a DC communication strategy to proactively plan and deliver DC communication based on actual participation and investment behaviour of their plan membership. A full 30% do not measure the success of communication and education efforts in any way.

There also appears to be a disconnect between plan members’ actual reactions to the recent market turmoil and plan sponsors’ perception: 45% of survey respondents indicated they felt that their members’ foremost reaction was to change their personal DC asset allocations, whereas in reality (as generally indicated by Canadian DC record keepers), plan members made few changes to their investments.

The evolution of DC

Sponsors seem to be open to re-thinking their DC arrangements – or at least to having them evolve.  Roughly 60% of survey respondents indicated that they have already added or are considering adding a group TFSA to the DC plan mix within the next two years.

“DC plans are in constant evolution, and plan sponsors still need to think through the long-term repercussions of 2008,” said Sharma.  “2010 will be a key year for plan sponsors to assess the lessons learned and implement changes to improve the effectiveness of DC plans over the long term.”

For more on Mercer’s 2009 Global DC Survey, or to register for the DC survey webcasts, visit http://www.mercer.com/globalDCsurvey.

About Mercer

Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges.

For more information, visit www.mercer.ca.

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