Saving for the future

Making life more affordable through efficient retirement savings

In its fall economic statement, the federal government launched a consultation on how best to strengthen retirement security for Canadians.

The consultation is welcome. The recent enhancement to the Canada Pension Plan, a years-long process that begins next month, represents an important measure to improve the public pillars of our retirement system, but much more can be done to help Canadians retire more comfortably and more affordably. The next step should be to help all workers have greater access to high-quality, collective workplace retirement plans, so that we can keep the cost of retirement low for individuals, employers and government.

Why place more emphasis on collective workplace retirement plans when Canadians can prepare for retirement on their own? Recent research released by Healthcare of Ontario Pension Plan (HOOPP), Common Wealth, and the National Institute on Ageing shows that the cost of achieving retirement security using a typical individual approach is up to four times higher than a high-quality collective plan. For a typical Canadian, this could amount to nearly a million dollars of additional lifetime savings to achieve the same level of retirement security.

The report shows that retirement plans become more efficient to the extent they adopt five value drivers:

  1. Make savings automatic, so workers save earlier and more consistently;
  2. Use efficiencies of scale to keep costs low, in contrast to Canada’s retail investment fund fees;
  3. Provide a buffer to save members from making common mistakes such as mis-timing the market or picking the latest “hot” stock;
  4. Use fiduciary governance, so the plan focuses on creating value for plan stakeholders; and, most importantly,
  5. Pool risks, so that retirees aren’t left on their own to manage the risk of outliving their money.

Unfortunately, Canada has been moving toward less efficient forms of retirement savings. Outside the public sector, workplace pension coverage has dropped from 35 per cent to 24 per cent since 1977. Lower-income Canadians, women, new Canadians, contingent workers and younger people are less likely to have access to a workplace retirement plan. A recent study found that Canadian families 55-64 without workplace pensions had a meagre $3,000 in median retirement savings.

With all political parties concerned about making life more affordable, expanding access to collective retirement plans is one area where they could agree to make a big difference.

A plan to make retirement income more efficient should include three main elements.

First, it should improve existing workplace plans that don’t currently use all five value drivers described above. A key example is helping Canadians better manage post-retirement risks by expanding access to longevity pooling vehicles.

Second, it should support the continuous improvement of the high-quality collective plans that we already have. The World Bank and others have highlighted Canada’s public pension plans as a model to the world. They are important national assets that deserve continued support in their quest to continuously add more value for all plan stakeholders.

Third, it should broaden access to high-quality collective retirement plans, or at least the value drivers, by expanding existing plans, creating new ones and adopting the drivers regardless of the retirement arrangement. Promising efforts are already underway, including an initiative by the non-profit sector to create a national plan called Common Good for the nearly one million workers in that sector currently without access to workplace retirement plans. Support from governments would foster more such efforts.

Saving for retirement ranks with housing, transportation and food as a major expense line in Canadians’ household budgets. If we can make any of these items even modestly more affordable without straining government coffers, we should do it. The potential for greater efficiency in retirement savings is enormous and could actually save governments money by reducing pressure on tax-supported programs such as Old Age Security and the Guaranteed Income Supplement.

Retirement is expensive, and with Canadians living longer and feeling more cost-constrained, finding efficient ways to pay for retirement is more important than ever. By expanding access to collective retirement plans, and to the value drivers in retirement savings, we have an opportunity to make life more affordable for Canadians, both while they work, and when they retire.

Jim Keohane is president and CEO of Healthcare of Ontario Pension Plan, Keith Ambachtsheer is director emeritus of the International Centre of Pension Management at the Rotman School of Management, University of Toronto, and Alex Mazer is co-founder of Common Wealth.

This op-ed was first printed in The Globe and Mail on December 16, 2018.

Alex Mazer

Alex Mazer

Alex Mazer is a co-founder and co-CEO of Common Wealth Retirement, a mission-driven financial technology company that provides straightforward, portable retirement plans. To advance our mission to make it possible for everyone to have a financially secure retirement, Common Wealth focuses on serving those not covered by workplace retirement plans, including SMBs, not-for-profits, self-employed professionals, and modest earners.

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