A report published by the Canadian Public Pension Leadership Council in February 2019 offers compelling evidence about the broad benefits of workplace pension plans.
The report, by Robert Brown, builds on a 2017 CPPLC report by Bob Baldwin that asked Canadians to quantify the maximum amount they’d pay, as a percentage of annual income, to maintain their standard of living in retirement. It found Canadians value workplace pensions — especially when they come with features typically found in defined benefit plans — and are willing to pay 10 to 20 per cent (or more) of annual income to secure them.
Baldwin’s report also noted slightly more than half (51 per cent) of all survey respondents reported stress about retirement planning had a medium to high impact on their work. Clearly, knowing they have a reliable stream of retirement income from a secure source gives Canadians valuable peace of mind — and there’s little doubt that working Canadians want a secure source of retirement income and are willing to pay for it.
Building on Baldwin’s research, the key advantages of workplace pensions identified in Brown’s report included improved workforce management, lower job stress, improved worker health and lower rates of use for government-funded assistance programs, such as old-age security and guaranteed income supplement.
“Canadian pensioners with stable, predictable [DB] retirement income are less dependent on government assistance, and they spend their pension dollars in local businesses,” stated Brown’s report. Not surprisingly, workplace pensions are more than just good for Canadian workers; they also help the local economy and reduce costs for both employers and governments.
Brown’s research found 78 per cent of retirement benefits come from investment returns, and those participating in larger DB plans can expect to receive 2.2 times the retirement income that non-DB investors receive from the same contribution amount. This is because DB plans carry lower investment fees, stronger investments and other advantages derived from their management of life expectancy risks.
Brown’s report also found improved retirement readiness among employees with workplace pensions: participation in a pension plan spurs workers to make greater savings in registered retirement savings plans and tax-free savings accounts, resulting in those workers having the highest income replacement rates in retirement.
It also highlighted the fiscal benefits workplace pensions create for local, provincial and federal governments. Pension income is taxable and spent in local communities, and retirees with workplace pensions rely less on government benefits such as OAS and GIS, neither of which are pre-funded; they must be paid from current tax revenues.
As well, the report recognized the economic impact of long-term patient capital, which helps stabilize the financial system. This is particularly relevant given that Canadian public sector pension plans are among the largest in the world.
With respect to workforce management, Brown’s report noted 52 per cent of employees surveyed said a DB plan is a factor in choosing a job and 69 per cent said it’s a reason to stay in a job. It also noted DB plans increase job tenure by four years (compared to tenure at organizations with no pension plan); that the promise of stable retirement income assists employers to match economic conditions; and that employees with DB plans are more confident in their retirement security and experience less retirement planning stress.
Considering both reports in tandem provides some key insights for governments, policy-makers and employers seeking to better understand what Canadians want from their retirement savings programs and what social implications arise from those desires.
For the most part, Canadians appear prepared to pay more of their current income into retirement savings programs that provide features typically found in DB plans: secure, predictable lifetime pensions that address longevity concerns and (in conjunction with other government and personal savings programs) permit Canadians to maintain living standards throughout retirement.
To the extent workplace pensions — especially those with DB features — are made available by employers, significant social benefits can be expected to flow to employees, employers and governments. These include:
- Employees will see their retirement planning stress alleviated, which will improve health, job performance and job tenure. They’ll be more confident and better financially, and emotionally, prepared for retirement.
- Employers will improve employee attraction and retention rates, which will reduce recruiting and training costs, creating a positively motivated and stable workforce that’s better prepared for retirement should workplace reductions become necessary.
- Employees and employers participating in larger DB plans experience cost savings and economies of scale that can be expected to result in 2.2 times more retirement income being generated from the same amounts they invest now, with approximately 78 per cent of retirement benefits coming from investment returns.
- Local, provincial and federal governments will all benefit fiscally from workplace pensions because pension income is taxable and spent in local communities, and because retirees with workplace pensions rely less on government programs. The economic impact of long-term patient capital, which helps stabilize the financial system, will also benefit all levels of government.
Workplace pensions, especially with DB features that enable workers to maintain living standards into retirement, are desired by Canadians, who are prepared to pay for these plans. Participating employers experience a healthier, more focused and more loyal workforce that’s better prepared for retirement.
Governments will enjoy fiscal benefits in the form of increased tax revenues and decreased demand for social benefits. And the Canadian economy will benefit from pools of long-term patient capital that will be invested, at least in part, in Canada. With this evidence in hand, it’s hard to imagine governments, employers and policy-makers not giving workplace pensions a higher priority on their agendas.