TORONTO, Oct 26, 2011 (BUSINESS WIRE) --

As corporations continue to shutter their traditional defined benefit (DB) pension plans, the retirement future of Canadian workers is increasingly tied to the performance of defined contribution (DC) pension arrangements. In these plans, only the contribution provided by the employer is determined in advance - not the final pension pay-out. To understand the workforce implications of this shift, global professional services company Towers Watson today issued its first DC Retirement Age Index, a quarterly "pension freedom" tracker that shows the effect of changes in capital market returns and annuity purchase prices on the potential retirement age of a Canadian worker in a benchmark DC plan.

As Michelle Loder, Canadian DC Business Leader at Towers Watson explained, "the negative impact on corporate pension financials of the "double whammy" of falling equity markets and declining interest rates has been a well-documented DB plan story this year. But there has also been a significant impact on DC and RRSP plan members, who similarly must cover a funding deficit -- but in their case though reduced personal spending or deferred retirement."

The Towers Watson DC RetirementAgeIndex tracks the performance of a balanced investment portfolio of a plan member who has contributed over a 20 year period from age 40 to 60. The performance of the plan determines the funds available at retirement to purchase a life annuity (a guaranteed annual income) from an insurance provider. Depending on the markets, the plan member might choose to retire early -- or be obliged to work longer in order to achieve the funding required to purchase the annuity. The Index begins with a member who started contributing in 1988, and chose to retire at the end of 2007. That member's annual annuity income, as a percentage of their final employment income, is the benchmark for later generations who start contributing at age 40 in a year after 1988. "Pension freedom" comes when an individual who stops contributing at age 60 can first purchase the benchmark annuity.

Looking back over the performance history, the 2008-2009 recession hit the savings and annuity purchase prices of later generations hard, delaying their pension freedom well beyond age 60. For a plan member who reached age 60 at the end of 2009, poor market returns while they were in their late 50s pushed their pension freedom back to age 62 -- if they wanted to have the same level of income replacement in retirement as the 60 year-old who retired just two years earlier in 2007. The trend did not subsequently improve, as future generations were also hit by higher annuity purchase pricing caused by declining interest rates. Reaching age 60 at the end of 2010 would have meant pension freedom arrived closer to age 64.

While this is bad news for plan members, the impact on plan sponsors is proving equally unexpected. As Ian Markham, Canadian Retirement Innovation Leader at Towers Watson, said, "given the continuing economic pressures, many employees who rely heavily on DC savings are delaying retirement, making it more difficult for organizations to determine if, when and how many older workers will retire, and how to manage their staffing needs. This has profound implications for employee engagement at all ages, as older workers stay put, taking career opportunities away from younger workers."

These concerns are not likely to fade anytime soon. In the shadow of a recession, continuing market turmoil and declining interest rates, September 2011 data from the Towers Watson DC RetirementAgeIndex reveal that pension freedom age is now drawing close to a startling 67 years.

"A DC approach can provide some funding stability for plan sponsors," commented Loder, "but there may be longer-term implications. Especially in uncertain economic times, employers may be well advised to carefully consider how to provide better education and tools to help DC plan members manage their retirement savings and expectations -- or be prepared for many more retirement-ready employees who may be working by necessity to achieve their pension freedom, rather than by choice."

About The Towers Watson DC Retirement Age Index

The Towers Watson DC Retirement Age Index tracks the effect on retirement ages of members in a defined contribution (DC) pension plan as a result of changes in capital market returns and annuity purchase prices, assuming that plan members are seeking a specific level of income replacement at retirement. The benchmark retiree is a 60 year-old member who retired in December 2007, after 20 years of contributing a consistent annual percent of pay into the plan, with those contributions having been invested in a balanced fund (half in equities and half in bonds). That benchmark retiree's pension amount (as a percentage of final pay) is set as the target for later retirees who would have the same 20 year contribution history and asset mix. If investment performance over a particular member's 20-year history is worse (or if annuity purchase prices at retirement are higher) than those our benchmark retiree had experienced, this member must delay retirement in order to achieve the same pension as the benchmark retiree. The DC Retirement Age Index tracks the delayed retirement age anticipated, assuming that the member makes no further contributions from age 60 until eventual retirement. To accelerate the ultimate retirement age, a plan member would be required to continue making contributions beyond age 60.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.

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SOURCE: Towers Watson

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