As employer-sponsored pension plans and personal retirement savings continue to shrink, the third pillar of Canada’s retirement income troika, the publicly funded Canada Pension Plan, is seeing improvements.
Some of the enhancements, which are being gradually phased in from Jan. 1, 2019, borrow from what Australia already has in place for its superannuation system. In Canada, for instance, both employer and employee contributions to the CPP are mandatory. Over the next seven years, the combined contribution rate will incrementally reach 11.9 per cent for earnings up to the original earnings limit and eight per cent for earnings in the additional earnings range.
Down under, responsibility for compulsory contribution lies solely with the employer, while employee contribution is voluntary. Also, Australia’s superannuation system is based on individual accounts, like a defined contribution plan, compared to Canada’s collective CPP, which is a defined benefits plan.
Since it’s essentially a DC plan, Australians have considerable flexibility in choosing their investment strategies based on their own preferences and circumstances, says Felicity Walsh, head of institutional and alternatives at Franklin Templeton Investments for Australia and New Zealand. This includes the option to switch or split their superannuation between different funds, and even establish a self-managed fund.
Plan members can also withdraw their superannuation account balances as a lump sum at retirement, or even before, and without penalty in cases of severe financial hardship, to meet the cost of medical expenses and in the case of terminal illness. The plans also fully vest to the individual and can be bequeathed on death.
In addition, superannuation earnings are concessionally taxed at 15 per cent and are usually tax-free in the retirement drawdown phase. That’s another big incentive for individuals to set dollars aside to fund their retirement and keep their savings within the system as they move from the accumulation to the decumulation phase, says Walsh.
She commends Australia’s taxation structure for its super funds. “It doesn’t unduly favour upper income earners. In some countries, Canada included, high-income earners — those earning four times average earnings — benefit from a higher overall tax advantage than average earners and low-income earners — [those] earning 60 per cent of average earnings.”
David Orford, managing director of Australia-based Optimum Pensions Pty. Ltd., says another benefit of the super funds is their ability to add assets to the private sector, without much — if any — government control. “They are invested in our industries and used to buy back our companies from overseas control and create jobs.”
While Canada’s pension system is public, he suggests the country could similarly benefit from compulsory contributions invested in a private pension system. “The maximum pensionable earnings in Canada are also relatively low — $57,400 in 2019,” he says. “A super guarantee, contribution-style system could have much higher limits. In Australia, the limit is $216,120 [in 2019].”
The flip side
Despite the level of individual freedom and incentives allowed by super funds, they do have a flip side. Victoria Lee, a retirement solutions consultant at Aon, says the Australian system is only better for more seasoned individual investors who desire more flexibility. “It’s a risk for average investors who need to be responsible for their own retirement savings and for the decisions they make — both good and bad.”
In addition, most super fund members aren’t actively engaged and don’t make the most of the choices outside of the default options, says Walsh.
Rob Vandersanden, an international pension consultant and partner in retirement solutions at Aon, believes the CPP is a more efficient and secure way of delivering retirement benefits than most DC plans. “When you look at a typical return earned in an individual DC plan, it tends to lag what you’d earn in DB plans overseen by pension committees comprised of professional advisors.”
Individuals, he adds, are asked to make complicated investment decisions they’re sometimes not comfortable with. “They tend to avoid risk and end up with a smaller pension as a result.”
Perhaps the biggest criticism faced by super funds is their scant protection against longevity risk. According to Orford, fewer than one per cent of Australian retirees elect to receive their retirement benefits in the form of a lifetime pension that broadly keeps up with inflation.
“That’s why, while the size of Australia’s superannuation assets is greater than those in Canada — despite Canada’s population being roughly 50 per cent larger than Australia’s — Canadians outperform us in their standard of living in retirement.”
Kanupriya Vashisht Handa is a freelance writer based in Milton, Ont.