CAAT's CEO on Moving From Pension Envy to Pension Solutions
Many Canadians haven’t saved nearly enough for retirement. Those without any workplace saving program have a median savings of just $3,000. Such meager savings would not last the average retiree more than a year. Canada will see increased health care and social support system costs if we don’t address this gap in a meaningful and thoughtful way.
The truth is, it’s not easy to save for retirement. It’s difficult to start, easy to get overwhelmed and drop out and difficult to get good unbiased advice.
The best possible retirement savings plan and the one that most Canadians want is a defined benefit pension plan. Those lucky enough to have a defined benefit pension likely work in the public sector. Eight in 10 workers in government and broader public sector workers in Canada have access to a DB pension, while one in 10 private sector workers do.
When it comes to workplace retirement savings, there is an imbalance between those who have, and those who have not – sometimes described as pension envy. It raises the fundamental question, why can’t more working Canadians have access to a DB pension?
Canadians don’t need to be convinced that most Canadian DB pensions are expertly run and sustainable. They know that DB pensions are valuable and an efficient way to prepare for retirement. They also know that DB pensions are unavailable to most workers and that leaves too many Canadians with the nagging feeling that DB pensions themselves are unfair. Due to ongoing economic upheaval in the wake of COVID-19, this sentiment will only grow. We will not be able to stem the tide of pension envy until we address the proverbial elephant in the room: improving access to defined benefit pensions.
As Canada emerges from the pandemic, will the pension sector seize the moment to build better workplace retirement options that meet the needs of working Canadians and employers?
It is well known that DB plans have been in decline in the private sector since the 1990s. There are some who have already written the obituary for private sector DB plans.
Plan sponsors, especially for single-employer plans, are seeking options to reduce the financial risk to the company balance sheet. As a result, private sector employers have been steadily moving their employees to riskier and less efficient retirements savings programs, like DC arrangements, group RRSPs or to nothing at all. The move is shifting the entire risk for retirement savings to individual employees where retirement outcomes are less certain, more stressful, and are expected to deliver a lower standard of living per contribution dollar.
In addition, if you don’t have a secure lifetime DB pension, outliving your retirement savings account is a real risk. As longevity continues to improve, future retirees can expect to live beyond 90. As well, investment experts know that average returns have decreased steadily each decade over the last 40 years and that trend is expected to continue. These factors make securing a reasonable standard of living in retirement even more challenging.
While DB pensions in the private sector have been in decline, the pooling of longevity and investment risks makes them the most efficient retirement savings vehicle. They are also highly desired by Canadian workers.
According to a recent national survey on Canadian retirement income preparedness, 79 percent would rather their employer make pension contributions than receive that money as salary. As well, 82 percent said that all workers should have a pension that guarantees a percentage of their working income in retirement.
Addressing pension envy through improved access to sustainable pensions
Pension envy is real and serious and it’s in everyone’s interest to address the challenges that loom large on the horizon by providing access to defined benefit pensions for more working Canadians.
The not-for-profit CAAT Pension Plan has listened to the concerns from employers, workers, and unions and decided to take a leadership role in bridging the growing gap across Canada. Their innovative DBplus design is addressing those needs. For our part, the CAAT Pension Plan is open for growth in membership from the public, private or not-for-profit sectors in Canada. This includes workplaces currently offering defined-benefit pension plans (and want to take advantage of CAAT’s size and lower risk profile), defined contribution plans, group RRSPs, and those with no current workplace retirement savings plan.A
Although DBplus was only made available to all Canadian workplaces in 2019, members from about 50 employers have already joined. CAAT now has members across Canada from 10 industries and has support and participation from 15 unions and member associations.
And CAAT is not alone in closing the gap. For example, OPTrust Select is available to the Ontario not-for-profit sector and provides DB pensions to these groups that wouldn’t otherwise have access. CAAT also recognizes that DBplus may not work for all workplaces and will continue to participate in improving the Canadian retirement system for all.
It is through better access that we will move the discussion from pension envy to pension solutions, benefiting workers, employers, and Canada as a whole.
Let me first thank Derek Dobson, CEO of CAAT Pension Plan, for kindly taking the time to write this excellent comment.
Now, before I share my thoughts, make sure you also see the National Survey of Canadians’ preparedness for Retirement, which HOOPP posted in September 2020.
I covered this with HOOPP's Steve McCormick here and it's an important topic which Derek refers to.
The basic problem is this:
- Most Canadians do not have enough retirement savings to help them live a comfortable retirement.
- Only a small segment of the population which works in the public sector still has a defined benefit plan (DB plan) they can count on to help them achieve a decent retirement.
- While most workplaces are closing up DB plans, there are innovative solutions to help employers meet the retirement needs of their employees which are better than group RRSPs. CAAT's DB Plus is one such solution which offers a defined benefit solution to employees and employers willing to pay a little more in exchange for a secure, defined benefit pension payment.
It's not the only innovative DB solution out there. OPTrust Select seeks to address the retirement needs of Ontario's non-profit sector.
My own thinking? You already know it. The brutal truth on defined-contribution plans is they're not working, too many Canadians are simply not saving enough for retirement.
For example, I read last year's BMO study on RRSPs and here are the main findings:
- 69 per cent of Canadians now hold an RRSP account, compared to 60 per cent last year
- Average amount held in RRSP accounts hits $111,922, up by almost $10,000 compared to 2018
- On average, Canadians plan to retire at 62 – but most are unable to estimate how much money they would need to retire comfortably
Now, even when you factor in CPP/ QPP, OAS, retiring at 62 on $112,000 is really not a lot and that's an average, not a median.
I know 50-year-old doctors, lawyers, accountants with over a million dollars in their RRSPs and they still are worried they won't be able to retire comfortably at 65 with rates at record low levels. And they have their houses paid off (they'll be fine).
My point is this, retiring at 60 or 65, you still need to plan ahead for the last 20 years of your life and figure out a way to stretch those meager savings over 20+ years.
What about TFSAs? Again, like RRSPs, they help at the margin but Canadians aren't saving enough there too and when they do, they don't utilize it properly.
According to a BMO survey, Canadians put more money into their TFSAs in 2020 despite the financial crisis caused by the global pandemic. The annual report conducted by the bank found that the average amount held by Canadians in TFSAs rose by more than 9% to $30,921 from a year ago.
But here's the hitch, instead of investing that money wisely in dividend ETFs or stocks like BCE or Telus, Canadians are leaving it in cash, which defeats the purpose.
And you don't need to invest it in dividend stocks and ETFs, you can invest in the S&P 500 ETF (SPY) or in riskier ETFs or stocks depending on your risk profile but again, most Canadians are just leaving it in cash because either they don't know what to do or are too scared to invest it.
What does this tell you? It tells me we need to wake up as a country and come to terms with the fact that we are not providing good retirement solutions to Canadians looking to retire with a secure income stream during their golden years.
Let the big banks and insurers peddle crappy, high fee mutual funds for RRSPs and TFSAs, but if you ask my opinion, it's high time we look into providing a well governed DB plan for all Canadians.
Enhanced CPP will help once it fully kicks in but it's not enough. We need to offer more DB solutions like CAAT's DBplus and OPTrust Select to more Canadians.
Well governed, well managed pension plans investing across public and private markets all over the world which have a shared risk model embedded in them is the solution.
What worries me is too many Canadians are not enjoying a DB plan, not because they can't, but because their employer hasn't explored all the available options (and they don't cost a lot).
Investing money over the long term is very hard, now more than ever, even for professional pension fund managers.
But if we pool investment and longevity risk and introduce risk-sharing, we can offer Canadians a defined benefit plan they can count on. And if it's one thing all Canadians understand, it's the value of a good pension.
This is what Derek Dobson so eloquently discusses in the comment above.
I hope large and small employers are paying attention and I invite them to learn more about DBplus here.
Below, learn about how DBplus member’s contributions work to provide a secure lifetime pension and other valuable benefits and how employers benefit from DBplus.
Lastly, most people have seen his iconic speech at the Lincoln Memorial in 1963 but take the time to watch Martin Luther King Jr.'s Nobel Peace Prize acceptance speech in the auditorium of the University of Oslo on December 10, 1964. Great speech, it rings true today just as it did back then.