RBC first bank to have DC-only pensions

There are other changes to the existing DC program effective July 1, including increases to RBC’s matching contributions and employee annual contribution limits.

Today, RBC employees must invest 3% of their pensionable earnings to receive a 100% matching contribution from the bank. In addition, employees may make optional contributions of 1%-5% of their pensionable earnings, and would then receive a 50% matching contribution from RBC on their first 2% of optional contributions

Under the new program, employees will receive an annual contribution of 3% of pensionable earnings, up to the year’s maximum pensionable earnings, from RBC. Employees will also be able to make optional contributions of 1%-8% of their pensionable earnings, with the bank providing more generous matching contributions than it does today.

RBC advisors surveyed for Investment Executive’s 2011 Report Card on Banks and Credit Unions who are on the current DC platform have mixed views on the revised DC pension plan.

An RBC advisor in British Co-lumbia says the new DC plan is “fairly decent. [RBC] matches 3% for 3%, same as everyone else.”

However, a colleague in Ontario was displeased with the bank’s matching contributions: “It can do better. I would like to see more contributions.”

The changes will help the bank ensure more predictable pension costs in the future, RBC has said in a statement. In contrast, corporations have to make up any and all shortfalls in pension benefits for DB plans.

It is mainly for this reason that companies are moving toward the DC model. A 2009 Statistics Canada report reveals that slightly more than two million of the private-sector employees who are enrolled in a pension plan were on the DB model in 2006, vs 2.3 million in 1991. In contrast, the amount of those on a DC plan has doubled during the corresponding period, to 766,800 from 384,000.

“I, quite frankly, think that DB plans are an antiquated model that won’t be around for long,” says George Hartman, president and CEO of Market Logics Inc. in Toronto. “Every time the opportunity arises, most employers are looking to switch.”

With today’s securities markets on shaky ground — combined with historically low interest rates — DB plans have become an even bigger concern for firms. As a result, says Paul Forestell, senior partner with Mercer Canada, a Toronto-based pension consultancy that’s working with RBC on changing its pension program, “The companies that have been switching have been doing it because of the volatility they’ve been seeing in their DB plans.”

Monica Townson, a pension expert who served for 11 years on the Pension Commission of Ontario, says employers are taking the DC route “because it lets them off the hook” — they no longer have to guarantee a pension that’s linked to an employee’s years of service and earnings.

With a DC plan, says Townson, “What [employees] get at retirement will depend on what choice of investment they make and how those investments will do. You can get a wildly different outcome. If you retire when markets are really down, what you have in your fund will not buy nearly as good a pension as what you were hoping to get. It’s much more uncertain.”

Thus, it’s disad-van-tageous for an employee to have only restricted access to the DC model, Townson says. She’s concerned about the impact this can have on recent hires upon retirement: “We’ll see a cohort of younger workers who won’t be nearly as secure in their retirement as the current generations are with [their] DB plans.”

However, from a hiring standpoint, Hartman thinks the DC model favours the younger demographic: “The mindset of the typical relatively young employee is not lifetime loyalty to the firm. The real power of DB plans only comes into play for people who stick around for many years.”

Forestell agrees, noting the payout from DC plans “gives relatively more money to people who leave before retirement. So, you can work 10 years, switch jobs and you’ll take more of your pension money with you.” He’s surprised more banks have not leaned toward the DC model.

However, Townson thinks it’s only a matter of time until this happens — and that employees will not be happy when it does. “It’s going to happen all over the place,” she says, adding that “the recent strike at Air Canada and the walkout at Canada Post were based [in part] on putting new hires on DC plans.”

Georges Cabana, vice president of total compensation with Montreal-based National Bank of Canada, says employers who sponsor DB pension plans have always been challenged with increasing costs, market instability and funding costs. “Embracing the DC option is one solution among others,” he says. “In that regard, RBC’s announcement is not the first — and it will not be the last.”

For now, the rest of the banking sector has made no move to follow suit. Cabana says National Bank will continue offering its DB plan to employees.

“That’s the kind of plan other [channels in the industry] are lacking,” says a National Bank advisor in Ontario surveyed for this year’s Report Card on Banks and Credit Unions. “It allows you to plan better. You know what you’ll get at the end of the year.”

Toronto-based Bank of Montreal also will keep its DB plan in place, says Gabriella Zillmer, BMO’s senior vice president of performance alignment and compensation: “We review our plans regularly to ensure they are sustainable and competitive, and any changes would reflect these considerations. However, we currently have no plans to make changes.” IE