Defined contribution pension plan members are currently in a different place, especially the younger generations, who are likely feeling as though their financial priorities don’t line up with workplace pensions the way they did for previous generations.
“What I’m getting at here is the idea that retirement saving isn’t the undeniable consensus top priority it once was,” said Rob Carrick, the Globe and Mail’s personal finance columnist, during the keynote address at Benefits Canada’s 2023 Defined Contribution Investment Forum. “For baby boomers, pensions have almost a religious significance — pensions are your great reward for working hard all your life. [Generation] X-ers are similar, but I’m starting to wonder if younger workers have a somewhat different view.”
Most of all, younger generations want houses, he said, but saving for a down payment will often require all of their financial resources. For those generation-Zers and millennials who do own houses, huge amounts of mortgage debt mean they aren’t able to save for retirement. “They also don’t see themselves staying in jobs long enough to build a significant pension.”
Carrick called July 2023 an “epic period of disruption in finance,” referring to the record high levels of inflation and interest rates, which are likely the highest pension plan members have ever seen. “When you read about how stressed people are about money . . . , just remember that this is permanent. We have created a generation of people who think they’re always doing the wrong thing with money and that something is amiss, regardless of how their finances are.”
One consensus in the financial industry is the existence of a retirement crisis, but that notion isn’t coming from retirees, he said, noting today’s seniors are the wealthiest or second wealthiest generation. “The retirement crisis is more about the idea of saving for retirement. People are never saving enough for retirement, but I think that’s a mirror image of people feeling bad about what they’re doing about money. People think, ‘I’m not doing well.’ And everybody else thinks, ‘Yes. You’re not doing well. You’re not saving enough.’”
Indeed, a quarter of Canadians aren’t saving into a pension plan at all, he said, referring to real estate as “the great distraction.” Young people — in their 20s, 30s or even early 40s — are mostly focused on getting into the housing market, but it doesn’t mean they aren’t interested in retirement.
“Young people do care about retirement,” said Carrick. “People today like to portray the younger generation as being a bit flighty and non-serious. And I think that’s sort of a permanent thing — older generations always look down on younger generations. But regarding today’s young people, they’re very wired in about money. Don’t underestimate them. They know what they’re up against. They know the problems. They may choose different solutions than you think would be ideal, but they understand the problem.
“They understand about retirement. They know defined benefit pension plans are non-existent unless you work in government. They know they will have to save for retirement. . . . They understand they’re probably going to be working past 65. They accept that.”
Ultimately, the traditional timeline of retiring at age 65 and funding a 30-year retirement isn’t realistic anymore, he said. “There has [been] this rigid timeline in life — you have to do everything by a certain age: get a house in your 20s, retire in your early 60s — not necessarily.”
As well, there are so many other financial priorities competing with retirement savings, said Carrick, referring to student debt in addition to the housing market. While the new first home savings account became available through financial institutions in April, he said many big banks haven’t started offering it yet. “When you start to see the full spectrum of financial companies offering them and the marketing ramping up, you’re going to see even more interest in them. I’m curious to see if any employers start offering them in a group format. I think there would be huge interest on the part of young people.”
The irony in the midst of all of these competing financial priorities, said Carrick, is that it’s a great time to invest. Stocks are defying recession forecasts and bonds are poised for a strong run as soon as interest rates have peaked, he noted, before highlighting some investment trends that are affecting DC plan members.
Carrick said he loves target-date funds because they guide plan members into the right outcome and do the rebalancing for them. He also called exchange-traded funds one of the best investment products of the past 25 years. And he referred to environmental, social and governance investing as an interesting topic.
“I know pension funds are doing it, but I’m not really seeing it in the questions I’m being asked by readers. I’m not seeing it in the asset flows. I think three or four times over the past 20 to 25 years, I’ve heard that this sector is exploding. It happened when they were called ethical funds and it happened when they were called socially responsible funds and now it’s happening [with] ESG funds.
“I’m not saying it’s a fad and I’m not denigrating it — I happen to believe in it myself — but I don’t think it’s captured anyone’s imagination in retail investing. And that’s worth keeping in mind as you figure out what options you want to offer [your plan members].”
Finally, Carrick referred to financial literacy as the “death phrase in personal finance,” because it implies financial illiteracy and no one wants to think they’re illiterate. “People need to be more literate about their finances, but wellness is a term that really resonates. It has good, positive connotations and I think people are wide open to it. They recognize [they] can improve their financial wellness and that sounds like a proactive thing to do.”
Ultimately, he said all of these negative trends are actually a solvable problem. “If we encourage financial wellness [and] we up our games on communicating to employees the importance of doing this, of making sure retirement gets its fair share of spending, . . . then I think we can get to a point where the next generation of retirees will be as well off as the ones who are succeeding today.”
Read more coverage of the 2023 DC Investment Forum.