Although canada’s overall pension system remains solid relative to those in other countries, says a pension expert, significant gaps in our country’s retirement savings regime, combined with today’s persistently low interest rates, will require Canadians to put aside increasingly greater amounts for retirement, work later in life or accept a lower standard of living in retirement.
“There’s no pension system in the world, weak or strong, that does well when interest rates are low,” says Scott Clausen, partner in the retirement risk and finance business with the Toronto-based Canadian division of global consulting firm Mercer LLC.
According to the recently released Melbourne Mercer global pension index – which examines the strength of the public and private pension systems, as well as the level of personal retirement savings, in 18 countries – Canada still boasts one of the more stable pension systems in the world, ranking sixth.
“Canada has a well-diversified, multi-pillar approach to retirement savings,” Clausen says.
The combination of government programs, such as the Canada Pension Plan (CPP) and the old-age supplement (OAS), along with employer-sponsored plans, RRSPs and personal savings provide Canadians with more comprehensive retirement coverage relative to other countries.
However, significant issues exist, including: the demographic realities of the aging population and longer life expectancies; a volatile investment market; the decline in availability of employer-sponsored pension plans to private-sector employees; and stubbornly low interest rates, which are depressing investment returns in pension funds.
In fact, the Office of Superintendent of Financial Institutions recently reported that some 93% of the pension plans it supervises in federally regulated industries were underfunded as of Dec. 31, 2011, compared with 76% the year prior. That result appears to be consistent with what is happening with defined-benefit (DB) plans across the entire private sector. Underfunded plans pose a possible risk for members of these plans.
“If the plan sponsor is financially weak, it is possible that it may file for bankruptcy to avoid having to top up its underfunded pension plan. This has happened in the case of a number of corporate plans,” says Alan White, a professor of finance with the Rotman School of Management at the University of Toronto. “If the sponsor is in a strong financial position, it is much more likely that it will ultimately fund the plan.”
However, pension experts note that although underfunded plans grab headlines, defined-contribution plans and individuals’ RRSPs also are struggling under the same economic conditions, resulting in poor investment returns and the expectation of lower benefits in future.
“Individuals have the same problem as DB sponsors, in that I have an obligation to pay myself a pension [out of my personal retirement savings],” says Rick Robertson, associate professor with the Richard Ivey School of Business at the University of Western Ontario in London, Ont. “Every year, I put in assets into my retirement savings, invest them wisely and monitor them. But the reality is the rate of return I can reasonably expect in the future has declined dramatically.”
Canada’s pension system might be improved, Clausen says, if Canadians were provided with more employee-sponsored retirement savings options, such as the proposed pooled registered pension plans, particularly if they could be kept low cost; if Canadians had more incentives to save more for retirement to make up for the shortfall in current pension investment returns; and if they were encouraged to delay retirement.
Recent moves by Ottawa to raise the age of eligibility of the OAS, combined with recent changes to the CPP to further discourage individuals from receiving early benefits and reward them for delaying receiving them, are steps in the right direction, Clausen says: “It’s recognizing the fact that people are living longer.”
However, only an expansion of the CPP program is likely to stave off a future pension and retirement crisis, which could be the biggest social issue facing the country over the next decade, Robertson says: “[An expanded CPP program] would address longevity risk; it would address investment risk. It’s the ultimate sharing of risk that there is.”
Without such a big, shared solution, Canada will face, in the coming years, a cohort of retirees who will not have sufficient assets to take them through retirement, putting pressure on governments to step up and assist.
Robertson also predicts continued tension between public-sector workers, who have enjoyed membership in government-sponsored DB pensions, and the underpensioned, private-sector employees who help pay for those public-sector pensions through taxes. He also foresees tension between older generations, who have access to employer pensions, and the younger generations, who will not have as many options.
Says Clausen: “We’ve been through one of the roughest decades, in which investment rates just have not been there, and interest rates have been low, so it’s very expensive to provide a pension or find guaranteed income. Everybody wants a large, low-risk, guaranteed pension – and that just doesn’t exist anymore.”
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