Editorial: The path to 15%

We often hear that to ensure a reasonable chance of having a good retirement outcome from a defined contribution pension plan, plan members should aim for total contributions of 15 per cent of their income to their retirement savings accounts.

But how many Canadians are putting anywhere near that much away? It doesn’t seem likely. As statistics compiled by the Canadian Institutional Investment Network in its annual CAP benchmark report have shown, combined pension contributions between employees and their employers have generally been in the range of nine to 10 per cent.

Read: More pension plans using target-date funds as default option

While those numbers are fairly decent and many people also contribute to registered retirement savings plans, there’s room to boost contribution levels even more. That’s why it’s good to see companies like BASF Canada Inc. leading the way with a plan that makes it quite feasible for people to reach the 15 per cent mark. The company puts an automatic five per cent into its defined contribution plan, regardless of what employees do. It then matches employee contributions up to five per cent, thereby getting them to 15 per cent.

There’s a cost, of course, and with employers already facing higher premiums for the Canada Pension Plan, many of them may not be willing to put more into their own offerings. But with the move away from defined benefit plans predicted to continue and the resulting concern about retirement outcomes in the near future, it’s hard to argue that an employer that contributes two per cent of salary is doing enough.

Options for boosting contributions include modifying the matching formula. As Great-West Life’s David Harris pointed out in the 2016 CAP benchmark report, employers could contribute 50 cents of every dollar an employee puts in rather than providing a full match. That way, employers could keep their maximum contribution the same at, say, four per cent, but they’d provide a greater incentive for employees to put in more — eight per cent — to get the full match.

Read: How BASF helps employees triple DC contributions to 15%

It’s the opposite of the much more generous incentive offered by BASF Canada but it’s a potential way to encourage better outcomes. In that case, employers would need to consider active efforts to encourage staff to maximize their plan rather than seeing their total contributions go down.

An employer in that situation would also do well by increasing its contribution by a percentage point to five per cent since it would provide an incentive for employees to put in more while getting them to the 15 per cent goal. Other options include escalating contributions that start lower and gradually increase over time.

BASF deserves credit for its moves to help employees save for retirement. But even for those employers that can’t afford or aren’t willing to be as generous, it’s important to consider how their plan design can get plan members closer to 15 per cent.

Glenn Kauth is the editor of Benefits Canada.

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