Group RRSP, DC plans a powerful combo

One-two pension punch ‘growing like crazy’ as employers abandon DB plans
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 02/07/2008

As defined benefit (DB) pension plans are increasingly phased out, many plan sponsors are rolling out defined contribution (DC) plans to shift more of the financial risk to employees. But for a more complete retirement package, group registered retirement savings plans (RRSPs) are proving an attractive companion.

“The combination of DC plans and group RRSPs taking the place of DB plans is a huge theme in Canada,” says Lori Bak, Toronto-based vice-president, client relationships and marketing, group retirement services at Sun Life Financial Canada.

“We see far more companies going from a DB to a DC and adding group RRSP to round out the full offering. If a plan sponsor is thinking of stopping a DB and moving fully to a DC or group RRSP, they can step their toe in the water with a group RRSP because it puts the responsibility on the individual — it starts them learning the process and weaning them off a more paternalistic plan into a more proactively managed plan by themselves.”

While DB plans still account for more than one-half of assets in Canada, group RRSPs and DC plans are “growing like crazy” and almost equal each other in terms of assets, says Bak.

Offering a group RRSP in addition to a registered pension plan can help reduce cost volatility, improve employee engagement and understanding and share the responsibility better, says David Burke, Toronto-based retirement practice director at Watson Wyatt Canada.

“Some want to transfer the responsibility to employees lock, stock and barrel and allow them more flexibility and help them understand responsibility (through a group RRSP) or they want to make sure the money is used for retirement, so (they offer) a money purchase plan,” he says. “For many employers, keeping some kind of defined benefit plan or reduced-level (plan) should be considered because over time they are the most efficient in providing retirement income, no question.”

One big consideration is how employees treat the RRSP — as a short- or long-term savings vehicle. Every employer has to decide how comfortable it is knowing employees may take money in a group RRSP that’s not locked in to buy a car or take a trip to Las Vegas, says Burke. To prevent this, some plan sponsors put rules in place, such as penalties for early withdrawals.

There is little research showing which retirement plan employees prefer, he says, but offering both can serve as an attraction and retention tool, as some employees might prefer to have a flexible savings program they can dip into, if needed, while also enjoying the steady income of a registered pension plan.

In addition, most people with traditional DB pension plans don’t tend to appreciate them until they’re in their 40s, says Burke. But DC plans tend to be more visible since employees are presented with a choice of funds and regular information from the administrator on balances or fund performance.

SaskTel is one company that offers both a group RRSP and a DC plan, even going so far as to contribute to both. It introduced a DC plan in 1977 when it closed its DB plan and now contributes seven per cent in addition to four per cent from employees. But in 2005, through union negotiations, it added a group RRSP to which SaskTel contributes six days’ pay annually.

As a crown corporation, there are periods when SaskTel is restricted from giving additional wages, so this made sense, says Smith.

“If we thought it wasn’t going to help we wouldn’t have done it but we considered (a group RRSP) a good benefit that a lot of companies have,” she says.

While SaskTel’s pension plan is locked in, the group RRSP is only locked in during the term of employment, so employees can cash it in when they leave.

“Studies show, statistically, younger people don’t necessarily plan for retirement, not all of them are interested — and here it was kind of forced upon them — so they have a pension plan and a group RRSP,” she says.

Sometimes employers contribute to both plans because of a legacy group RRSP they contributed to in the past, while more recently adding a “true” DC plan, says Jean-Daniel Côté, partner at Morneau Sobeco in Montreal.

But this tactic also makes sense in providing employees with more flexibility with their savings, he says, “particularly when a significant portion of employees are younger, where they may want to use their RRSP towards a home purchase plan or lifelong learning.”

However, Peter Gorham, also a partner at Morneau Sobeco, says it would be wiser to take the employer’s contributions and have them all go to the DC plan to avoid payroll taxes.

But judging by many of those on

Canada’s Top 100 Employers

list, particularly larger companies, combining a DC or DB pension plan with a smaller RRSP plan to encourage additional savings is popular, says Richard Yerema, editor of the annual list published by Toronto-based MediaCorp Canada.

“The number of Canadians who do contribute to RRSPs is quite low and we don’t see the affects today but certainly down the road those issues will manifest in the quality of life people have (when they retire) so anything the employer can do to encourage or educate people to be mindful, and matching contributions is one way.”

Sarah Dobson is editor of Canadian Compensation & Benefits Reporter. For more information, visit

Paying out

Retiree payments hit record levels

Contributions to employer-sponsored plans rose to $8.8 billion in the second quarter of 2007. And pension benefits paid to retirees held steady at the record level of $7.8 billion paid out in the first quarter. Benefit payments, which have been rising steadily over the last two years, were up 10.4 per cent compared with the second quarter of 2005.

Source: Statistics Canada

Pension Assets

Value of employer-sponsored pensions nearing $1 trillion

The market-value retirement savings for the 4.6 million Canadians workers with employer-sponsored plans grew to $950.3 billion in the second quarter of 2007. Here’s where that money is invested:

Stocks and equity funds41.3
Bonds and bond funds31.4
Real estate6.3
Short-term investments3.2

Source: Statistics Canada

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