Pension coverage in the public sector is high, with the vast majority of public sector employees covered by a defined benefit pension plan.
However, the story is very different in the private sector as pension coverage is much lower and is trending downwards. Only 22 per cent of private sector employees participated in a registered pension plan in 2019, which was down from 31 per cent in 1989.
Even more noteworthy is the downward trend in DB coverage. Only nine per cent of private sector employees participated in a DB pension plan in 2019, down from 26 per cent in 1989. Most private sector workers either participate in a DC pension, a group registered retirement savings plan or don’t participate in a workplace pension program at all.
While some may view the retirement prospects of many private sector workers as bleak, a combination of recent events and longer-term trends may turn the tide. Since the coronavirus pandemic began, some industries have experienced a significant spike in resignations and retirements, often referred to as the ‘Great Resignation.’ The Canadian unemployment rate was 5.3 per cent in March 2022, the lowest rate on record since 1976 when comparable data began to be tracked.
Not surprisingly, many employers are struggling to find the talent they need. The shortage of workers will likely persist over the coming decades as baby boomers continue to retire and the ratio of retirement-age to working-age Canadians increases. In short, this may be the beginning of an extended period during which there will be a war for talent. Employers can look to pensions as a means to attract and retain workers and differentiate themselves from their competitors.
It’s highly unlikely that private sector employers will return to the type of DB pension plans they may have sponsored in the past. However, there’s no shortage of potential plan design and governance options that may be both attractive to employees and financially viable for employers.
Among the design options are DB pension plans that provide discretionary enhancements, such as pre-retirement and post-retirement indexing; jointly-sponsored pension plans, in which participating employers and members share both the responsibility for governing the plan and the plan’s financial risks and rewards; target-benefit pension plans, which have fixed contribution requirements but permit accrued benefits to be reduced if needed to keep the financials of the plan in balance; DC pension plans which include decumulation options that provide lifetime retirement income by pooling investment and longevity risks; and large pension plans that are open to employers who want to offer a retirement program to their employees, but who don’t want — or are too small — to operate their own plan.
Pension plans could be even more powerful as attraction and retention tools if they’re provided in the context of an employer’s broader offerings for improving the financial well-being of their employees.
One should also keep in mind that employers are uniquely positioned to help their employees plan for a secure retirement, as they’re usually trusted by their employees and are better equipped than other stakeholders to provide this support.
Employers and employees will need to be educated on the characteristics and merits of the various pension plan designs and, in some cases, regulatory barriers must be removed. It’s also important to find ways to make more plan design options accessible to small- and mid-size employers, which should include providing access to options that pool risks with other employers.
We’re at a point at which the interests of key stakeholders are aligned from a pension perspective: many employers are engaged in a war for talent, employees need a secure retirement and, with an aging population, policy-makers desire an even stronger retirement system. Canada is also blessed with a talented and innovative pension sector. Is it possible that all these elements could come together and generate a private sector pension renaissance?