As policymakers consider the sufficiency of the current retirement income system in Canada, they must explore the full picture of retirement assets — including those in non-registered accounts, the Investment Funds Institute of Canada recommends.

In IFIC’s submission to the federal Department of Finance on Canada’s retirement income system, the institute notes that a significant portion of Canadians’ savings are sitting in non-registered vehicles such as tax-free savings accounts. It refers to these savings as the “fourth pillar” of the retirement savings system.

“The debate related to Canada’s retirement income system must include a discussion of all potential retirement assets,” said Joanne De Laurentiis, IFIC president and CEO. “This fourth pillar, with its significant asset base, can only serve to enhance the retirement income of Canadians.”

Investor Economics estimates that this fourth pillar represents approximately $1.7 trillion, or roughly the same amount saved in the third pillar of the system, which includes defined benefit and defined contribution plans, and group and individual RRSPs.

Investment products such as mutual funds play an important role in the fourth pillar, IFIC notes.

“The mutual fund industry in Canada has been consistently providing Canadians, primarily through advisors, the opportunity to build and maintain effective and suitable portfolios of funds based on a customized assessment of each client’s circumstances,” the submission says.

It suggests that this customized approach helps Canadians meet their specific retirement goals more effectively than the “one-size fits all” approach that defined benefit pension plans provide. This is particularly true in the current environment of low interest rates, which will make it challenging to generate attractive returns on fixed-income assets in the future, according to IFIC.

It notes that when comparing defined benefit plans to mutual funds in the two-year period from 2008 to 2009, mutual funds’ returns net of virtually all fees outperformed the largest most economical defined benefit pension funds in Canada.

Defined benefit plans “will likely be constrained in their ability to match the returns of individually styled portfolios for meeting the retirement goals of Canadians,” the submission says.

The “one-size fits all” approach, IFIC adds, “may not have optimal levels of equity exposure for younger employees due to the presence of older active lives and/or retired lives in the plan.”

IFIC calls for a retirement savings system that provides access, choice and flexibility, and solutions that correspond to the interests of individual Canadians.

IE