CPP only first step toward retirement
Enhanced pension is good base, but you still need personal savings and a workplace plan
Now that Finance Minister Bill Morneau has attended to the urgent business of plumping up the Canada Pension Plan, what next in the world of retirement savings?
“In the wake of CPP reform, a lot of people are going to say, tools down, we’ve got the job done,” says Tom Reid, senior vice-president of group retirement services at Sun Life Financial. “But there’s still a lot more work to be done, right?” Right. One might consider that a constant and rigorous review of the country’s retirement savings system demands an ongoing examination of the role of the corporate sector. What kind of job is your company doing for you?
We know the trend line: the migration away from defined-benefit pension plans, which pay out a guaranteed sum to the employee, and the migration to defined-contribution pension plans, which transfer the investment risk to the employee. It is the employee who now assumes the stress, if not the savvy, of an investment manager.
For a growing group of Canadians, gone are the days of not having to worry about asset allocation and ROI. Arrived are the sad days of woefully studying the anemic returns on those money market funds. (Reid advocates for “target date funds,” which reduce equity exposure and increase fixed-income exposure the closer the employee gets to retirement.)
Of course, companies like Reid’s benefit precisely because of all that money that needs to be managed, so let’s get that out of the way first. (Sun Life administers close to $70 billion in assets on behalf of about 1.3 million Canadians.)
Reid says there’s about $200 billion of assets in defined-contribution plans in Canada. And then there are the fees, a deep irritant especially when the returns are pitiful.
“The average plan that we administer with 1,000 members has fees of 40 basis points, all in,” said Reid, meaning a modest 0.4 per cent. Fees have come down dramatically over time, he says.
So DC plans are here to stay and will multiply in number going forward. I could find but a single example of a newly created definedbenefit plan, or at least relatively new.
In 2009, the TD Bank announced it was going against the DC trend, launching a pension plan that would provide employees with the security of a regular retirement income “designed to be the best fully bankpaid pension plan in the industry.”
The plan targets employees with earnings below the CPP maximum pensionable earnings of $54,900 and offers a top-up provision on the salary above that limit. The words “fully bank-paid pension” jump right off the page.
If anyone knows of other examples, please write.
Otherwise, the corporate world continues to shun defined-benefit plans in favour of their definedcontribution cousins. Or a company might offer a group RRSP plan (not, technically, a pension plan). Or possibly a deferred profit-sharing plan. Or, alternatively, nothing at all.
Prospective employees examining what a company has on offer might consider this: the median savings rate for DC plans in Ontario is 10 per cent, with a 5-per-cent contribution from the employee and 5 per cent from the employer. Anything less, I would argue, is inadequate.
So CPP in this scenario becomes what Reid calls the base layer.
“On top of that base layer of CPP, you can create a pretty strong retirement outcome,” he said.
This, of course, is the objective. Reid sees this as a three-legged construct. CPP is one. Personal savings is another. And company-incentivized savings is the third.
“One of the key principles that we’ve been espousing for a long time is that there should be universal access to a workplace savings plan,” he said.
Reid advocates for something along the lines of Quebec’s Voluntary Savings Retirement Plan.
Quebec’s VSRPs are to be phased in, starting at the end of this year for companies with 20 or more employees. Enrolment is automatic, though there is an opt-out option.
Investment savings will be managed by external administrators. Employers are under no obligation to contribute. Eventually, the VSRPs will be extended to businesses with as few as five employees.
“I think creating universal access with automatic enrolment would be a remarkable accompaniment to CPP reform,” Reid said. “I think we could create, easily, the strongest retirement savings system in the world.”
Perhaps “easily” is a step too far. But what is clear is that the job of secure retirements is far from done. jenwells@thestar.ca