Sebastien Betermier on Bolstering Canada's Retirement System
A well-designed pension system brings enormous social and economic value to its members and society as a whole. Retirees have a reliable source of income during retirement when they are elderly and vulnerable. Retirees are also more inclined to spend and contribute to a healthy economy when they can rely on a steady income source. In addition, a well-capitalized pension system encourages disciplined savings from an early age, which can lead to significant wealth accumulation over the life cycle and lower financial stress. These savings are invested in businesses, real estate, and infrastructure projects, which further contribute to a healthy economy.
Unfortunately, Canada’s pension system does not stand out on the global stage. According to the Mercer CFA Institute Global Pension Index, Canada scores a B and ranks 17 out of 48 countries. This is passable but not great. What can Canada do differently to strengthen its pension system? I’ll use the Rule of Three and discuss three distinct strengths of the Canadian pension system, three major problems, and three actionable solutions.
Strengths of the Canadian Pension System
The Canadian pension system has the distinct advantage of being balanced, providing a combination of safety and flexibility. Programs such as Old Age Security Pension (OAS) and Guaranteed Income Supplement (GIS) are means-tested and provide a social safety net for those with lower incomes. The Canada Pension Plan and its Quebec analog, the Quebec Pension Plan, provide a defined benefit plan for all Canadians. CPP/QPP benefits are portable, indexed to inflation, and cover up to one-third of the average Canadian pensionable earnings throughout retirement. In addition to these government schemes, many employers offer corporate pension plans to their employees. And individuals wishing to save more have a menu of tax-efficient vehicles to invest in.
The financial sustainability of the CPP/QPP schemes presents another distinct strength of the Canadian pension system. Thanks to important reforms passed in the mid-1990s, these national schemes, which previously operated on a pay-as-you-go basis, are now partly capitalized. Over the past twenty-five years, the high return generated from the invested capital has enabled the schemes to stay afloat and keep contributions and payouts stable despite the increased funding pressures resulting from the ageing population. By contrast, pension systems that continue to operate exclusively on a pay-as-you-go basis, such as the system in France, face mounting financial imbalances that are triggering politically unpopular discussions about raising the retirement age.
Another unique strength of the Canadian pension system is the strong governance structure of its large public-sector pension plans, which provide defined-benefit pensions for the military, teachers, and other public-sector workers. These plans operate at arm’s length from their governments, are run like private-sector organizations, and are renowned globally for their cost-efficient investment model, which consists of investing directly in a wide universe of assets ranging from listed equities to private infrastructure. The high returns earned over the past 20 years (about 8% annually on average) have enabled these plans to pay decent pensions to Canada’s public-sector workers and remain open and fully funded.
Challenges Facing the Canadian Pension Landscape
Unlike the public sector, where pension coverage is excellent, pension coverage in the private sector is surprisingly low, which partly explains the B score. Nearly 80% of private-sector workers do not have access to an occupational pension scheme. And for the 20% that do have access, the benefits offered by the plans are often subpar.
Part of the problem is the high level of market fragmentation. Each province has its own regulator, making it challenging for companies hiring workers in multiple provinces to offer consistent and scalable pension plans. Added to this, most pension plans are tied to employers. This means that individuals relocating to another province or switching jobs may accumulate several pension pots, making it challenging to keep track of the different pots.
The low household savings rate is another problem: Canadians do not save much for retirement. Canada has the highest household debt-to-disposable income ratio in the G7, at 185%. Furthermore, a survey conducted online with 2,000 Canadians aged 18 and over reveals that 4 in 10 Canadians have less than $5,000 in savings. Almost a third of unretired Canadians aged 55-64 say they expect to continue working in retirement to support themselves.
A third problem is that the governance of our public-sector plans is under threat. The eight largest Canadian pension funds, collectively known as the Maple 8, currently manage over CAD 2 trillion of assets. Increased nationalism and concerns about low productivity growth in Canada have triggered a hot debate about whether governments should exert greater control over the way pension funds invest. Last Fall, the Alberta government abruptly dismissed the entire board and CEO of AIMCo, the large asset manager for the province’s pensions and endowments.
Actionable Reforms for a Stronger Pension System
The more assets public-sector pension plans accumulate, the more tempting it will become for fiscally constrained governments to control the way the plans’ capital is invested. Stronger guardrails must be established to ensure the plans remain operationally independent.
One such guardrail is the adoption of an independent committee to identify and nominate new pension fund board directors who are appointed by the government. This will maximize the likelihood that new directors are highly qualified and non-partisan. Another guardrail is the requirement that the legislative branch confirms the new directors. This will ensure the appointments are made with parliamentary review and scrutiny. Finally, governments should not have the ability to terminate board directors before the end of their term under regular circumstances. This will ensure the directors have the freedom to act with a long-term focus, free from political pressures.
For private-sector pension plans, the priority is to bring them up to par with the public-sector plans. For this to happen, we need to create scale. One path forward is to adopt a common set of standards and regulations for registered pension plans across provinces, which goes above and beyond the current CAPSA guidelines established by pension regulators to promote the coordination and harmonization of regulatory principles and practices across provinces. A common set of standards and regulations will level the playing field, provide an easier, more consistent, and scalable environment for employers, and reduce costs.
Another pathway to creating scale is to promote pension plan arrangements that do not require an employer-employee relationship. This is the pathway pursued in Australia, where employees can request their employer to direct pension contributions to the pension plan of their choice. These plans do not offer the same degree of customization as employer-based plans, but are much more scalable and specialize in handling a large number of small accounts efficiently. In Canada, such a structure does not exist. One exception is the Saskatchewan Pension Plan (SPP), a defined-contribution plan created by the Saskatchewan government that is available to all Canadians, is portable, operates at arm’s length from government, and does not require an employer-employee relationship.
In addition to creating scale, we need to improve the quality of private-sector pension plans. Most private-sector organizations provide a standard defined-contribution plan where employees are on their own and bear all the risks. The challenge is how to reduce risks for members without transferring those risks to employers.
One solution is to encourage the growth of jointly sponsored pension plans such as CAAT Pension Plan, Healthcare of Ontario Pension Plan (HOOPP), OPTrust Select and University Pension Plan (UPP). Jointly sponsored pension plans allocate risk across a broader membership base than single-employer plans and provide a “DB-like” stream of retirement income for employees without exposing employers to a significant risk of rising contributions. Another solution is to promote the growth of Variable Payment Life Annuities (VPLAs). These new types of annuities, which were recently proclaimed into law in Canada, provide an opportunity for pension fund members to pool a part of their retirement savings. In doing so, members can reduce important risks such as their own longevity risk in a cost-efficient way without putting employers on the hook.
Building the Political Will for Change
Scoring an A on the Mercer CFA Institute Global Pension Index is possible. We know what the issues are and how to fix them. It’s a matter of building political will and coordination, and learning from other countries that have reached near-universal pension coverage and offer cost-efficient pension solutions for the private sector. Pushing forward these changes is a no-brainer, as a more robust pension system will improve financial well-being, reduce senior poverty and dependence on government, and encourage long-term investments.
I thank Sebastien Betermier for sending me this excellent comment.
He's a well-known pension expert in Canada and his knowledge of our pension system is second to none.
He highlights all the important points but there are areas where I disagree with him on some of his views.
First, he's right, Canada has a decent pension system with Old Age Security (OAS), Guaranteed Income Supplement (GIS) and CPP/ QPP benefits forming the three-legged stool, but there is a growing retirement crisis and it's entirely in the private sector where comprehensive coverage is low or non-existent.
And let me be crystal clear, by comprehensive coverage, I mean the gold standard, a defined-benefit plan backed by the provincial or federal government that retirees can count on till the day they die.
Earlier this week, I discussed HOOPP and Abacus Data's 2025 Canada Retirement Survey.
Among the key findings:
- Fifty-nine per cent of unretired Canadians do not think they will ever be able to retire due to their financial situation. Half (49%) have not set aside any money for retirement in the past year and 39% have never saved for retirement.
- Nearly two-thirds (62%) of Canadians view homeownership as a key part of their retirement strategy, either as a financial investment or a source of stability in retirement and as part of their strategy, half (50%) of unretired homeowners plan to rely on the sale of their home to set themselves up for retirement.
- More than a third (36%) of Canadians report having less than $5,000 in savings, including for retirement, and one-in-five (20%) have no money saved. Those who do not own a home are significantly more likely to have less than $5,000 saved (57% vs. 19% of homeowners).
- An overwhelming majority of Canadians (88%) would choose to pay 9% of their salary, with contributions matched by their employer, to a DB pension plan in exchange for a lifetime income in retirement.
That last point is telling because the majority of Canadians are screaming out "we need help to retire in dignity" but nobody is listening to them.
Their MPs at the provincial and federal level all have gold-plated defined-benefit pensions guaranteed for life and all they need is to serve two full terms to get it.
Added bonus, these MPs can vote for hefty pay increases when they think it's deserved and that also boosts their pension payout (for life).
Why do you think Jagmeet Singh stuck around, he wanted his pension. And while Conservatives were targeting his pension, their leader Pierre Poilievre is set to draw more than $230,000 annually once he turns 65.
Anyways, back to Sebastien's comment and bolstering Canada's retirement system.
He's absolutely right that our Maple Eight funds are the envy of the world, operating like businesses independently from government and the long-term returns support this notion.
More importantly, they all have more than enough assets to meet their long-dated liabilities and this is the ultimate measure of success for any pension plan.
So that independent governance is critical and producing the much-needed long-term results.
Sebastien then claims the governance of our public-sector plans is under threat using what happened at AIMCo as an example when the Alberta government abruptly dismissed the entire board and CEO.
Here is where I have different views and let me explain.
What happened at AIMCo was unfortunate but it was also a big warning shot across all of Canada's large pension funds, if you piss off your major shareholder, the provincial or federal government, your board and senior management can easily be fired and replaced.
I know for a fact many provincial governments and the federal government are becoming increasingly uncomfortable with giving their public pension funds too much leeway as compensation runs amok and costs mount, so while we are unlikely to see another Alberta "clean the house up" episode ever again, never say never.
In other words, independent governance is truly a balancing act and these large Canadian pension funds are increasingly being asked to provide a lot more detailed transparency on where they invest and every aspect of their operation including compensation and costs is being scrutinized.
So, they have to satisfy their most important shareholder, their sponsor governments which have enormous power and will use it if they're not happy with their relationship with their large pension investment managers.
At the end of the day, whether they like it or not, these are Crown corporations, not private investment managers and they need to manage their most important relationships with governments accordingly if they want to maintain their independent governance.
That's what the AIMCo cleanup proved to me at least.
What else? I like Sebastien's idea of adopting an independent committee to identify and nominate new pension fund board directors who are appointed by the government.
In my opinion, given the complexity at these shops, you need to seriously consider putting more former employees from all departments (front office, back and middle office, risk, finance and IT) of large Canadian pension funds at the board levels.
There are pros and cons about placing former employees on the board as I've seen good and bad outcomes from doing this but the complexity of these shops and their underlying strategies, you can't expect to find qualified people with the requisite experience to properly assess and monitor all their activities.
I'll be blunt, most board members look great on paper, they're smart and experienced people but many of them are in over their head overseeing activities at these large Canadian pension funds.
But I want to be clear, hiring a former CEO or senior executive from a Maple Eight fund to put them on your board doesn't guarantee better oversight (it could backfire and perpetuate more problems/ abuses) but I know through my conversations with senior people, many board of directors at the Maple Eight funds are in way over their head (most are fine and all learn a lot along the way).
It's a tough job overseeing these large pension funds and it’s not getting any easier.
Lastly, Sebastien is right, we need to create scale and offer private sector employees better retirement outcomes.
We need to use what is working at CAAT Pension Plan, UPP, HOOPP to expand coverage but I also think we need bigger and bolder action here and offer every private sector employee a defined-benefit plan like public sector workers have.
The most important retirement legislation in Canada was passed years ago, it's called enhanced CPP and it will help future generations of Canadians retire in security but it won't help Canadians getting ready to retire over the next five, ten or fifteen years.
I'll state once again what I stated a couple of days ago, we need a royal commission to look into bolstering Canada's retirement system and we need it sooner rather than later.
We have to think outside the box and discuss all options including creating a new large pension fund that covers existing private sector workers who have no DB plan, model its governance after the Maple Eight funds.
What about Canada's large banks and insurance companies, how will they react? If they're smart, they will welcome such a development and focus on delivering value add where they can, wealth management and other services.
Again, in my opinion, it's time to think big and think boldly.
Let me once again thank Sebastien Betermier for sending me his comment and getting me to think hard about what needs to be done to bolster Canada's retirement system.
Below, in this webinar, pension researcher Sebastien Betermier from McGill University presents findings from a GRI report that he co-authored with Keith Ambachtsheer from the University of Toronto and Chris Flynn from CEM Benchmarking. The focus of the research is to identify trends in how much Canadian pension funds invest in Canada (from 11 months ago).
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