I just read a report by Bill Kyle, Senior Vice President of Great-West Life in the Group Retirement Services. I report was full of great information but I wanted to share one section of the report on the evolution of Capital Accumulation Plans.
For some of you who are not aware, Capital Accumulation Plans (CAPs) are simply employer-sponsored investment plans. They include Defined Contribution Pensions (DC), Group RRSPs, and Deferred Profit Sharing Plans (DPSP).
Group retirement plans in Canada have come a long way.
Back in the 1960’s, employers typically offered either a Defined Benefit Pension Plan (DB) or a Defined Contribution Pension Plan (DC). Group RRSPs were pretty much non-existent back then as RRSPs were first introduced in 1957. The contribution limit for RRSPs was the lesser of only 10 per cent or $2,500. For those employees who were not part of a pension plan their only future income in retirement would come from government benefits. Defined Benefit Pensions were primarily offered by large corporations and entities. Small and medium size businesses found it impossible to justify the higher costs of administering a defined benefit plan.
Most Defined Contribution pensions were invested in ‘paid-up deferred annuities. These plans were fully guaranteed because the deferred annuity factored in mortality, expenses and investment growth.
In the 1970’s inflation started to increase and so did interest rates. Many Group retirement plans started to move away from deferred annuities to GICs and other guaranteed investments. The problem with deferred annuities is they did not follow interest rate increases. In other words, their rate of return was ‘fixed’ at the time of purchase. GICs and other guaranteed investments increased returns as interest rates increased. Guaranteed investments were still attractive because they were simple, easy to understand and somewhat predictable.
In the 1990’s, interest rates changed direction. Instead of increasing year after year, they started to fall. Today interest rates are 80% lower than they were at their peak in the 1980’s. As these guaranteed investments started to come due, investors started to look at alternative investments like mutual funds and the stock market. The stock market experienced one of the strongest bull markets in history in the 1990’s so many investors and members of Group retirement plans, started to demand more choice and control over their retirement funds. We saw a significant shift in investment offerings. We saw more equity based investments which then required much more education and information.
In the early 2000’s the stock market took a massive hit on the chin. The tech bubble of the 1990’s busted and investors’ portfolios were decimated in a very short period of time. Many people’s retirement plans had to be adjusted right away.
In 2004, the regulators (Joint Forum of Financial Market Regulators), introduced some guidelines for employers when implementing and managing a Capital Accumulation Plan. Basically, they instituted some changes that already was occurring in the investment industry outside of the group market. The goal was to institute some minimum standards to ensure that plans were set up properly and managed well. It was clear in the guidelines that Employers had to offer minimum amounts of information, education and tools to help employees make better decisions with their hard earned savings.
Today, the investment industry has gotten more complex than ever. Employees or plan members have access to more information than they know what to do with. Despite the higher levels of information, education and tools, increased choice and complexity have created new problems. The internet has created more opinions and less facts.
Today, there are more Defined Contribution Pensions and Group RRSPs because many companies and organizations are moving away from Defined Benefit Pensions. Let’s face it! Capital Accumulation Plans are the way of the future and employers should look at implementing Group RRSPs and Pensions as part of their overall benefit package.