While the Canadian retirement income system is performing well overall, it still requires some assessment to determine its primary goals and how changing one part of the system may affect the other parts, according to a new report by the Office of the Superintendent of Financial Institutions.
“Basically, what we’re trying to say [in the report] is that it’s not possible to achieve all these goals through one single plan, or one single pillar, so this is why many developed countries choose multi-pillar structures for their pensions,” says Assia Billig, acting director for the Office of the Chief Actuary.
The extension of the Canada Pension Plan is a perfect time to go back to this topic, she says, because the second pillar in the public system is becoming more important. But it’s also about finding a balance between the three pillars. ”In other words, when we look at multi-pillar systems, we need to think about how these pillars will interact, and how these pillars can’t exist one without the other.
“In some countries, for example, in Eastern Europe, they were trying to go more on the one or two pillars system and they weren’t very successful,” says Billig. “They needed to diversify. This paper isn’t purely on Canada. We tried to look around to see what’s happening in Denmark, the Netherlands, Sweden and Canada and other developed countries. For the developing world, the situation will be completely different.”
The report is aiming to show Canada’s strong public pension foundation, which includes the old-age security program, the CPP and the Quebec Pension Plan, she says. “CPP and QPP are an important part of our system. They’re financially sustainable, very well governed and becoming even more important with the expansion of the CPP and QPP. This is especially true for millennials and the next generation who will fully benefit from the expansion.
“So when plan sponsors or individual savers are trying to inform their retirement strategy, they should really take into account the public programs because they provide a good share of the future retirement income to individuals.”
However, the report also indicated that concerns have been mounting over the last few years around retirement savings adequacy based on a number of factions, including the decline in employer-sponsored pension plans. Currently, 62 per cent of the Canadian labour force aren’t in a workplace pension plan, according to the report.
The second factor is financial market volatility and the low interest rate environment resulting from the 2008-09 financial crisis, which complicated how individuals managed their retirement savings strategies.
Designing a pension system or introducing pension reforms isn;t a trivial exercise, and it requires an assessment of the primary goals, noted the report.
“It’s not realistic to expect that one single pension program can achieve all desired objectives,” it said. “Even if such a program existed, it would present significant concentration risk, as the entire retirement system would rely on a single program, akin to putting all your eggs in the same retirement basket.
“If it’s not realistic for a single program to deliver on all the objectives set by policymakers, then it must do so with multiple programs or multiple parts.”