I’ll be retiring at the end of September, so this will probably be my last article for Benefits Canada, and certainly my last as an employee of Morneau Shepell Ltd. While the natural final topic would have been a look back at the high points in the pension industry since the mid-1970s, it may be more interesting to use my experience to make an educated guess at what the future has in store.
In spite of Yogi Berra’s pithy pronouncement — “It’s tough to make predictions, especially about the future.” — it isn’t that difficult to produce a plausible forecast. To a large extent, future developments will be dictated by human nature or demographics, which are either immutable or at least highly predictable.
Read: Fix Canada’s pension system by harmonizing retirement ages
Let’s start with an easy one. The laws and regulations governing pension plans will never be harmonized across the country. Each jurisdiction will protect its own turf, meaning they’ll insist on the right to regulate plans that affect their own population. Therefore, multi-jurisdictional pension plans will always be more difficult to administer than they should be. In case you think this assessment is too pessimistic, let me point out that Benefits Canada has been publishing articles on harmonization since at least 1980 (and probably earlier).
Another reason why harmonization is so elusive is that no public sector plan is subject to multi-jurisdictional rules. Experience suggests that if a pension problem doesn’t directly affect civil servants, and doesn’t make the headlines, the people who are responsible for change will be slow to act.
In any event, the lack of harmonization may not matter much given the second prediction, that defined benefit pensions in the private sector will eventually die. They’re already on their last legs with fewer than 10 per cent of private sector workers still covered by a DB plan. And, since most DB plans are now closed to new hires, the percentage of employees covered by one can only go down. There may or may not be a tipping point at which all the remaining private sector plan sponsors pull the plug on their DB plans.
Read: Registered pension membership rises, DB plan coverage drops: OSFI
Third, interest rates — both real and nominal — won’t return to their high levels in the 1980s and 1990s, at least not for a generation and possibly two. The main reason they got so low has only a little to do with the Great Recession and a lot to do with demographics. In aging populations, savers outnumber borrowers, which skews supply and demand with respect to investable funds, and thus depresses rates. Since the populations of every developed country (including China) will continue to age for a long time to come, it’s hard to see how rates can rise very much.
By the way, over the course of my 42-year career, the level of interest rates used for pension plan valuations has come full circle. For going-concern valuations, the typical rate was about 5.5 per cent back in 1976 and that’s more or less where it is now.
Next and most importantly, Canada is unlikely to make much headway in achieving retirement adequacy for the population as a whole. This will almost certainly be true even a half-century from now when the enhancement to the Canada Pension Plan is fully phased in.
In 2016, demographic projections performed by Bonnie-Jeanne MacDonald on behalf of Morneau Shepell showed that only one-third of Canadian retirees will enjoy an income replacement ratio in the so-called ideal zone, which I arbitrarily define as net (after-tax) retirement income of between 85 per cent and 115 per cent of average pre-retirement income (net of taxes, saving and various expenses). Yes, only a third. Another third will have inadequate replacement ratios and the final third (largely employees in the public sector, as well as some low-income workers) will have ratios that are excessively high, for want of a better term.
Read: CPP changes do little to ensure appropriate income for future retirees
It’s very difficult to envision a better result. Yes, the looming expansion of the CPP will help, but the improvement is rather modest and in any event it’s offset by: (a) an old-age security pension that’s shrinking relative to the average wage; (b) continued declining coverage in workplace pension plans (to some extent because of the CPP expansion); and (c) continuing low interest rates.
It’s highly unlikely that OAS will ever be expanded and another bump in the CPP can be ruled out for at least a generation or two. I suppose we could all save more, but what would drive us to make such a fundamental change in our spending and saving habits? In my opinion, the only factors that can produce a better result are a massive public education campaign (unlikely) or later retirement (quite likely).
On the subject of education, my final prediction is that smart decumulation will emerge as the most important issue in the retirement industry. I am referring to the process by which retirees turn their savings into regular and predictable lifetime income. Right now, decumulation is practically an afterthought, but an aging population that will rely primarily on their savings account balances for retirement security will change that. What will almost certainly boost the effectiveness of decumulation solutions will be artificial intelligence and better robo-advisors, which may appear on the scene within the next five years.
Read: Employers, government must step up to address decumulation dilemma
Fortunately for me, I’ll be long gone by the time readers can assess the accuracy of these predictions. I’m happy to have served within the pension industry over the past 42 years and extend my best wishes to both plan sponsors and service providers in their attempts to further improve our retirement income system.