By Derek W. Dobson,
CEO, CAAT Pension Plan
January 18, 2020
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 preparedness1, 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. 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.
1National Survey of Canadians’ preparedness for Retirement, by HOOPP, September 2020
CAAT's CEO on Moving From Pension Envy to Pension Solutions was featured as a guest comment article in Leo Kolivakis' blog Pension Pulse on January 18, 2021.