Are your clients’ pensions in trouble?

With pension plans losing money thanks to the market downturn, clients are becoming increasingly worried about whether they’ll have money left for retirement. And they have reason to be nervous.

The majority of plan members in Canada participate in defined contribution (DC) pension plans. These act like RRSPs, with members contributing money into different funds; their pensions depend on how well the markets are doing.

Needless to say, assets in DC plans are down.

“Everywhere in the world, the number of balances has fallen significantly,” says Janet Rabovsky, an investment consulting leader for Watson Wyatt. “It’s gotten to the point where, depending on how close a person is to retirement, they will have seen balances fall, and some people may even have to delay retirement.”

Stephen Bonner, a principal at Towers Perrin, says a drop in a DC plan likely won’t affect people who still have plenty of working years ahead of them; it’s the soon-to-be retirees that should be most concerned.

“They should be aware of what’s happening,” he says. “But keep in mind, people are still expected to live a while in retirement. Even a person about to stop working next year is likely still going to continue managing investments over most of their retirement.”

Part of the problem with DC plans is that many members are “apathetic,” says Rabovsky. A lot of them sign up to a plan and just leave it, without altering their investment strategy as they get older.

Ted Rechtshaffen, CFP and president of TriDelta Financial, agrees, adding that a lot of people with DC plans don’t include this portion of their finances in their financial planning. “A lot of times there’s a disconnect because it’s not really managed,” he says. “If my advisor is taking care of my RRSP, then I probably don’t have them looking at my group plan.

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“If there’s a big drop in a group RSP plan, that’s going to impact you just as much as a big drop in a personal RSP,” he says. “If clients are hurting in their regular RSP, then they’re hurting in their group RSP plans too.”

So what can someone in a DC plan do? Not much, Bonner says. Like every investment, it’s important to keep in mind that this market downturn is temporary, and it’s not time for clients to panic.

“This might be unbelievably painful for your clients right now, but the markets will turn around,” he explains. “It doesn’t continue going down in a straight line any more than it continues going up in a straight line. The important thing to impart is to take a long-term view of their investment.”

Rechtshaffen thinks the most important thing a working Canadian can do is to maximize his or her company’s contribution.

“Make sure you contribute, assuming you can afford it, so the company hits its ceiling to what it will contribute,” he says. “That’s the best investment anyone can make.”

Not all pension-earning Canadians will be affected by the market downturn — 90% of all pension assets are in defined benefit (DB) pension plans, in which the employer contributes a set amount to the plan.

“This is the group that has the least to worry about,” says Bonner. “The extra cost of the market downturn is on the employer’s nickel, not your client’s.”

It’s another story if a company collapses during the credit crisis, but most businesses that have a DB plan are either private companies or large public pension plans like the Ontario Teachers’ Pension Plan (OTPP). Bonner says it’s unlikely that companies with DB plans will file for bankruptcy during the credit crisis.

In some cases, like with the OTPP, employees may face higher contribution requirements if the plan becomes underfunded. Debra Hanna, a spokesperson for the OTPP, says there are no plans to raise contribution rates due to the current market crisis, although there will be a 0.8% increase in 2009, which is related to underfunding that happened before equities tanked.

She expects the plan’s funding to suffer somewhat because of market conditions, though in the end it shouldn’t matter. “We take a long-term approach,” says Hanna. “We’ve been through market cycles before. The best response is to focus on basics and not overreact.”

Even though a DB plan member might not be affected in the wallet, if plans are suffering, companies might have to cut spending in order to stay funded. That could result in job losses or tighter budgets.

It’s too early to tell exactly how people’s pensions will be affected, but retirees should be aware that they might have to make some adjustments in the months, and possibly years, ahead.

“Clients may have to work longer than they thought, or spend less or adjust retirement lifestyle expectations,” says Rechtshaffen. “It is a real loss of value. Saying that, in retirement the stress causes people to do strange things, so the number one priority is to make sure that your client has a real financial plan.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(10/20/08)

Bryan Borzykowski