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© Copyright 2000 Rogers Media. The following article first appeared in the February 2000 edition of
BENEFITS CANADA magazine.
Getting a grip
Canadians are learning hard lessons about their retirement planning. As a result, they will count
more on employers, and less on government.
By Dian Cohen
As the world approached new year's day, stock markets exploded almost as though they too were caught up in
the razzle-dazzle of a celebration not to be seen again for another thousand years. But in early January,
like an oversized hangover, they corrected. The record levels indexes and individual stocks reached only a
week before made other records sliding (only to bound upward days later).
When all that happened, pundits, as usual, outdid gurus with predictions for an essentially unknowable
future. For some, early January was the first dropped shoe signalling the long-awaited bursting of the
bubble. For others, early January was merely a refreshing pause. Statistics assure them that in the history
of money making, equities outperform any other investment vehicle over the long term.
This has immense relevance for ordinary Canadians and the people who help them manage their money. A
going-forward savings strategy will require a far greater knowledge of risk management than the average
investor has today. Now that most developed country deficits are under control, and the capital market will
not permit government spending beyond what the market's collective intelligence believes is reasonable,
governments are issuing fewer bonds at lower interest rates. So all institutional investors (including the
most prudent) are turning to higher risk vehicles to make the returns they need.
TAKING RESPONSIBILITY
It has not gone unnoticed by ordinary people that returns are higher in equity than fixed income
investments. Nor has it gone unnoticed that governments are having difficulty honouring the promise of the
welfare state (to shield people from the financial risks of life). That's why people are taking on the
responsibility for their own savings.
What has not yet permeated is that managing risk goes hand-in-hand with responsible investing. It has
certainly become a higher-than-ever priority among money managers. Managers of mutual funds who have not
taken seriously the art of risk management have not only seen their funds' performance suffer, they have
suffered the slings and arrows of outrage as unit-holders take their money and look for something better.
Employees in defined benefit (DB) plans have little opportunity to educate themselves in risk management,
since they are still part of an outdated and paternalistic system that assumes that workers need looking
after. Employers, however, are actively engaged in reviewing the terms of their DB plans to ensure that
they are honouring their pension promises in the most cost effective way. Over the next several years,
trends toward defined contribution (DC) plans and plans that are dis-integrated from the Canada Pension
Plan will gather momentum.
For those already in DC plans, or who invest on their own, it is never good enough to make choices without
a firm grasp of today's realities. The first reality is that governments can no longer claim omnipotence in
protecting people from the risks of life. Second, governments are far behind employers in providing
opportunities for people to invest in ways that meet their personal objectives. Government rules about
investing for retirement, for example, are shockingly outdated.
Third, employers are far more flexible than governments in adapting DB plans to take into account the needs
of the people on whose behalf the funds have been invested. Fourth, investing in equities is a sensible,
prudent activity. But it is one that requires readily available knowledge about investing principles,
specific investments and risk management.
Armed with these, people can go forward with confidence that they can have the life they want. Then,
inevitable market corrections will be buying opportunities for them, just as they have always been for the
most successful professional investor.
Dian Cohen is an economics consultant with a special interst in pension issues.
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