By BARBARA SHECTER, Financial Post September 24, 2011
Royal Bank of Canada, the country’s biggest bank, is terminating its defined-benefit pension plan for new employees.
Along with its big bank rivals, Royal had been among a shrinking number of employers offering a guaranteed retirement income to all employees. The bank’s defined benefit plan will be closed to new hires effective Jan. 1, 2012.
“The changes are a responsible way for RBC to better manage the retirement program by ensuring more predictable pension costs in the future,” Royal Bank said in an internal statement released Friday. “This will enable RBC to continue to provide retirement benefits that reflect current market trends.”
Defined-contribution plans have become a popular choice for companies in recent years because the payout at retirement is based on investment performance rather than a guaranteed amount agreed to in advance.
A prolonged period of low interest rates, combined with market volatility since the financial crisis of 2008, has forced companies to set aside more money to cover anticipated pension costs – and this has accelerated the shift to defined-contribution plans, industry experts say.
The plans first became popular in the 1990s when stellar market performance and frequent job changes made them even more attractive for some employees than definedbenefit plans. Canada’s largest life insurance companies, Sun Life and Manulife Corp., converted their plans at that time.
But the country’s banks did not. Toronto-Dominion Bank is sticking by that decision, saying in an emailed statement Friday it “has no plans to switch to a defined-contribution plan at this time.”
A spokesperson for Canadian Imperial Bank of Commerce said CIBC also has no plans to switch the pension plan at this time.
Figures from Statistics Canada show that about 800,000 working Canadians with a pension in the private sector have defined-contribution plans, compared to 1.7 million with defined-benefit plans, he said.
The public sector remains overwhelmingly served by defined-benefit plans, however.
A spokesperson for RBC said the bank is pairing its decision with enhancements to a defined-contribution plan that will be available to both new and existing employees, if they choose. The enhancements include an automatic RBC contribution, higher matching contributions, and higher annual company contribution limits.