Strengthening Canada’s retirement income system: creativity, collaboration and cost effective solutions required

Similar to the debate around Medicare in the 1960s, the future of Canada’s retirement income system is garnering attention as an issue of national importance. Like Medicare, which addressed the health care needs of Canadians, the growing focus on pension reform is looking at the financial health of our fellow citizens.

The issue has triggered all sorts of public discussion, building to a fever pitch last fall at the first ministers’ conference and making its way into the 2010 federal government budget; and, most recently, Ontario’s budget speech. In the weeks ahead, the Government of Canada will continue to conduct public consultations as it looks for creative and innovative ways to help improve pensions for Canadians.

We in the investment management industry welcome this opportunity to participate and play a leadership role in helping ensure Canadians are adequately prepared for their golden years. In a nutshell, the current system can be improved upon without spending a lot of taxpayer dollars, while preserving investors’ right to choose where they want to put their money—and when to do so.

We all know the trends: the number of defined benefit plans continues to plummet, while RSP contributions are significantly below allowable levels. This leaves many Canadians out in the cold on a number of tax and savings advantages.

But what many may not have noticed is a flourishing group of plans known as Capital Accumulation Plans (CAPs). They include Defined Contribution Pension Plans, Deferred Profit Sharing Plans, Group RSPs and Group Tax-Free Savings Accounts.

As well, a study conducted for one of Canada’s largest insurance companies earlier this year shows that, despite the economy, overall employer participation in group RSPs rose last year to 46% compared to 32% the previous year. Employees on average also contributed 4.5% of salary to their DC pension plans in 2009, up from 4.2% in 2008. Encouraging numbers, but a lot more can be done to encourage further creation and effectiveness of CAPs.

We believe the private system is best suited to provide the kinds of choices Canadians need to build their retirement nest eggs. This is a sentiment echoed by many others, including Bill Kyle of Great-West Life Assurance Company, who authored a report last year calling for collaborative reform that would lead to a stronger pension system for Canadians.

Canadians like choice and we are encouraging government to continue on that path. Individuals should be allowed—indeed encouraged—to contribute to RRSPs to mitigate the risk of over-reliance on a company pension and to enhance their overall ability to save for retirement.

There also needs to be more education to inform Canadians about the existence and use of financial products and how they fit in with registered savings vehicles, including Tax-Free Savings Accounts and RRSPs. An educated investor is an inquisitive investor—one who knows what kinds of questions to ask about a product or service, and who values the advice of an experienced and qualified advisor. And research suggests that offering education in the workplace significantly boosts financial literacy and may positively affect the number of employees who participate in plans and the amounts they save.

It is also interesting to note investors who rely on advisors end up with more savings. An Australian IFSA/KPMG study conducted in 2009 showed investors who use an advisor have higher savings and make more contributions than those without. This is due to a range of reasons, including advisors setting targets, pushing for regular contributions and helping avoid common behavioural mistakes such as excessive trading.

It is rather ironic that as we discuss ways of increasing pensions, some government policies are making it more difficult for Canadians to accumulate savings for their retirements. The impact of applying the HST to retirement funds, and the current Life Income Fund (LIF) practice of increasing payments on a graduated basis, cutting the principal of retirees’ savings funds, are just two examples to illustrate this point.

As a member of the Investment Funds Institute of Canada, we support the industry recommendations to:

• make it easier and more appealing for employers to establish retirement savings plans.
• increase the number of Canadians who participate and save enough in employer pension plans, GRRSPs, individual savings plans or other ways.
• ensure equivalent tax benefits for all Canadians, whether they are in the private or public sector or in DB, DC, group RRSP, RRSP or other tax-advantaged plans, both before and in retirement.
• enable Canadians to access the advice and expertise they want, when and how they want it.

We look forward to working with governments at all levels, financial advisors and investors and other interested stakeholders to collaboratively and creatively strengthen Canada’s retirement system in a cost-effective manner.

Blake C. Goldring, is chairman and CEO of AGF Management Limited.

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