There’s little doubt that working Canadians want a secure source of retirement income. The challenge for the pension industry is how to deliver the desired retirement income in a sustainable manner.
In April 2017, the Canadian Public Pension Leadership Council published the results of a survey that provided key takeaways that will be useful to governments, policy-makers and employers seeking a better understanding of what Canadians want from their retirement savings programs.
In essence, it found Canadians value the features typically found in defined benefit pension plans and are willing to pay to secure them. They also value participating in workplace pensions, especially defined benefit plans. And they’re adapting to meet their retirement objectives by, among other things, delaying retirement or engaging in supplementary post-retirement employment.
Clearly, knowing they have a reliable stream of retirement income is a valuable peace of mind for many Canadians. So let’s take a look at what retirement income options are available to Canadians:
While questions remain about the upcoming expansion, as a well-managed program, Canada Pension Plan benefits will deliver part of the secure retirement income desired by working Canadians.
Notwithstanding stories to the contrary, Canadians should consider the CPP a sustainable source of retirement income. But the level of benefits, even with the expansion, still remains short of most Canadians’ retirement income requirements. In other words, while they’re relatively secure and sustainable, CPP benefits alone are generally inadequate.
Old-age security and the guaranteed income supplement aren’t pre-funded and are subject to clawback or means tests. While they currently represent a secure source of retirement income for some Canadians, rapidly changing demographics may place significant pressures on them in the coming years.
Individual retirement savings
A 2016 report by the International Foundation of Employee Benefit Plans noted American and Canadian survey participants identified saving for retirement as their second-biggest financial challenge after debt management. Sixty per cent of participants reported having trouble saving for retirement.
In addition, Canadian household debt is of concern to the Bank of Canada. A review of current statistics reveals that, as a percentage of disposable income, Canadian households have significantly more debt than their American counterparts. Many Canadians, it seems, carry debt into retirement. They’ll require a secure source of retirement income to service that debt and shouldn’t rely on inflated home values to fill that need.
With savings challenges and high household debt levels, most Canadians without a workplace pension plan will find it difficult to save sufficient amounts during their working years to generate a significant source of secure retirement income.
Workplace pension plans
The myriad of concerns expressed by Canadians about their retirement savings include not knowing how much to save and outliving their savings; a lack of investment knowledge; volatile equity markets; the challenge of making investment decisions; high investment management and administration fees; low interest rates and expensive annuities; and successfully converting savings into secure income streams.
Registered retirement savings plans and defined contribution pension plans epitomize the type of retirement savings programs creating concern for Canadians. Defined benefit pension plans appear to address many of these concerns. And the Canadian Public Pension Leadership Council survey concludes the majority of Canadians want the type of retirement features found in defined benefit pensions and they’re willing to pay for them.
Of course, many pundits claim defined benefit pension plans are unaffordable for average working Canadians. But they shouldn’t be too quick to dismiss the defined benefit model as unaffordable or out of date. Many public sector defined benefit plans in Canada are fully funded. Often jointly governed, they share funding risks between employers and plan participants. Besides having professional administration, most plans have expert investment managers and operate with sophisticated and transparent funding policies. With contributions set at levels that ensure adequate retirement income, investment returns typically provide 70 to 80 cents of every pension dollar paid out. And because public sector defined benefits plans are usually multi-employer arrangements, they’re more sustainable than single-employer plans and can provide pensions at lower overall risk to employers and employees.
So the debate isn’t whether Canadians want the retirement security offered by a retirement program with defined benefit features or even whether they’re willing to pay more for the corresponding peace of mind. Those points seem relatively clear. Rather, the debate is, as noted earlier, whether it’s possible to deliver the desired retirement income in a sustainable fashion to all Canadian employees.
We need to have a national dialogue about how best to deliver the desired pension model in a sustainable fashion, bearing in mind that Canadians are willing to pay more for a predictable and secure lifetime retirement income.
Creating a sustainable retirement model with defined benefit features for all Canadian employees is worthy of additional study. It may require good old-fashioned Canadian ingenuity to create the model, but at least successful working prototypes already exist.
Let’s begin the dialogue with the proposition that Canadian employees are willing to pay more for retirement program features typically found in defined benefit pension plans and figure out how to reallocate our retirement resources to deliver the pensions that Canadians want.