Market rallies in recent months have made retirement more affordable for older workers than it was at the end of 2008, according to an analysis by Watson Wyatt, a leading global consulting firm. Despite the improvement, retirement is still much less affordable than it was in December, 2007.
As of the end of September, 2009, a 60 year-old Canadian defined contribution (DC) plan member would have to work nearly four additional years to secure the same level of retirement income as an employee of the same age with the same retirement savings history who retired in December, 2007, according to Watson Wyatt’s new DC Retirement Timing Index. The index tracks the health of DC members’ retirement prospects and reflects the combined impact of investment performance and interest rates on the their expected retirement dates.
“The economic crisis has derailed planned retirements,” says Lori Satov, senior retirement consultant at Watson Wyatt. “Large losses in DC pension plans are forcing older workers to make a difficult choice – accept a lower standard of living in retirement or work longer.”
If a larger population of older employees stays in the workforce, employers could face higher benefit expenses and may end up with disengaged workers on their payroll, which could lead to lower productivity.”
“From a financial perspective, DC plans have helped employers manage costs,” says Dan Morrison, senior retirement consultant at Watson Wyatt. “But from an HR perspective, they are creating a host of other issues.”
“Volatility in participants’ investment returns – and retirement security – is making it difficult for DC plan sponsors to predict and manage workers’ retirements. Unlike defined benefit (DB) plans, DC plans do not provide predictable, guaranteed retirement benefits nor offer incentives to retire at a certain age. To counteract the possibility of higher benefit costs and lower productivity, employers may find themselves having to offer early retirement incentives outside the pension plan to selected workers.”
DC plan members’ retirement prospects are slowly improving
Typical member has attained age 60 as of month shown with a history of 15 years of contributions into the plan assuming assets have been invested in a balanced portfolio (50 per cent equities, 50 per cent bonds) and that annuity purchase rates reflect market interest rates at each date.
Although older workers’ retirement prospects are worse than they were at the end of 2007, they are significantly better than they were at the end of 2008 – the thick of the economic crisis. In December, 2008, a 60 year-old would have had to work an additional five and a half years to secure the same level of retirement income as an employee of the same age with the same retirement savings who retired in December 2007.
For each month since December, 2007, Watson Wyatt’s DC Retirement Timing Index tracks the postponed retirement age needed for a 60 year-old member with 15 years of contributions invested in a balanced fund to secure the same level of retirement income as someone who would have retired at age 60 in December, 2007 with the same 15 year contribution history and asset mix. The prospective income derived from each $1 of funds is assumed to be either an immediate annuity at age 60 or where retirement age is postponed, a deferred annuity commencing at the postponed retirement age. Purchase rates are assumed to reflect contemporary bond yields on the purchase date. No allowance is made for future contributions during the deferral period. The balanced fund is based on a portfolio with half of the assets invested in equities (30 per cent Canadian, 10 per cent U.S. & 10 per cent EAFE) and half invested in bonds (45 per cent Universe & 5 per cent Short term).
To learn about Watson Wyatt, visit