Despite declining pension coverage, Canadians are doing relatively well in ensuring that they have adequate savings for their retirement, according to a research paper on retirement income adequacy led by economist Jack Mintz. And in fact, those saving for retirement outside of a registered pension plan have some advantages relative to those with RPPs, the research finds.

Mintz produced the report to provide the Federal-Provincial-Territorial Ministers of Finance with background information for their meeting in Whitehorse on Friday.

The report acknowledges that Canadians have been saving less since 1980. But when it comes to having adequate savings for retirement, it finds that Canadians have been doing relatively well.

A study assessing the proportion of Canadians saving enough to achieve retirement consumption levels equal to 100% and 90% of their consumption in working years, finds that 69% and 78% of Canadians, respectively, were successful.

For the Canadians failing to save adequately, declining pension coverage may not be to blame, Mintz’s research suggests. He points out that those with registered pension plans (RPPs) actually have less retirement income than those without RPPs, except for those in the highest income quintile. In addition, those with RPPs had less investment income, capital gains/losses and other market income than those without RPPs.

“These results suggest that declining RPP coverage may not lead to insufficient retirement saving since Canadians are investing in RRSPs and other assets to fund their retirement,” Mintz says.

But the research also shows that those with pension coverage are more likely to be retired between the ages of 67 and 72 than those without coverage, indicating that declining RPP coverage may result in an increasing proportion of Canadian deferring retirement to older ages.

The cost of advice

The report acknowledges that financial advisors play an important role when it comes to helping Canadians save for retirement. Mintz points out that creating a balanced and high quality investment portfolio requires expertise.

“Given that investors need to be savvy in investment choices, they often turn to advisors to help make their decisions,” he says. “Indeed, the role of financial intermediation is to reduce risk and information costs for investors.”

But the cost of advice can be hefty for Canadians, the research shows. Canadians investing in mutual funds face average costs of 200 basis points, including administration costs, cost of ongoing individual advice, cost of active management and cost of passive products. Advisory costs comprise the greatest proportion at 88 basis points for equity funds and 42 basis points for fixed income funds.

“This comes at a cost to the income they earn on their investments,” the report says, adding: “These costs are acceptable to the extent that they improve returns on their saving.”

The research notes that costs are generally much lower for exchange-traded funds and indexed funds. Furthermore, it points out that active management does not provide returns on a persistent basis any better than passive management, suggesting that index funds and ETFs may be a better choice for investors than actively managed mutual funds.

“Once taking into account active management costs, passive managed assets would provide superior returns,” the report says.

It suggests that financial advisors may not be conveying this message clearly enough: “Individual investors do not seem to be advised sufficiently to invest in indexed and exchange-traded funds to improve fund performance.”

In contrast to the fees facing mutual fund investors, pension plan administrative costs are much lower, at 30 to 45 basis points for private plans and 25 to 35 basis points for public sector plans. The CPP costs are 20 basis points.

“Overall, it is clear that pension plans offer opportunities to save costs for investors compared to retail mutual funds,” the report concludes.

The RRSP advantage

But Canadians investing in individual RRSPs enjoy a number of other advantages relative to those in pensions. The research shows that pension funds provide much less liquidity compared to other investments, since individuals cannot easily withdraw funds for contingencies or to invest in assets like housing. Also, when an individual passes away, pension benefits are not payable to an heir except to a spouse.

In contrast, Mintz says that RRSPs provide much more flexibility and choice.

Many financial services industry groups agree with this view of the value in RRSPs, and suggest that the best way to boost retirement savings is to enhance the current system. A recent report by the Canadian Bankers Association recommends increasing the age at which an RRSP must be closed out and taxing RRSP withdrawals at more favourable rates.

@page_break@“The retirement savings system in Canada is not broken, but it is in need of some urgent improvements,” said Nancy Hughes Anthony, president and CEO of the CBA.

But many Canadians remain convinced that broader pension coverage is the best solution. In a poll last week of more than 1,700 members of CARP, an advocacy group for older Canadians, 80% of respondents endorsed the creation of a supplementary pension plan. More than half of respondents said they do not agree with the financial services industry that the current system should simply be improved.

“The idea of a Universal Pension Plan has gained sufficient traction that it will challenge the retail investment industry to better serve Canadians or lose their business,” said Susan Eng, vice president of advocacy at CARP.

Mintz’s advice for policymakers is to thoroughly consider all issues at hand before making changes. “These issues are complex and given the long-term effects of saving decisions, it is important to make sure that any policy decisions do not have unintended consequences that impact on the ability of Canadians to save for retirement and other needs,” the report says.

IE