We all know we should be putting away some money every payday for our retirement. But what if there was a way we could figure out exactly how much we should put away so, after 25 years, we’d be able to have a pension equal to one-half our salary?
What if all the investment details were handled for us? And if we knew in advance what our pension would be?
What if the fees charged were miniscule?
This may sound too good to be true but, in fact, it’s a reality. All of this is possible with a defined benefit (DB) pension plan, which is the most effective and efficient retirement program that exists in the market today.
The Healthcare of Ontario Pension Plan (HOOPP) shows how the DB model can work. The average starting retiree in 2011 received a pension of $19,200 and, in all, more than $1.3 billion in pensions is paid out every year. Eighty cents of every pension dollar paid comes from HOOPP’s investments, and HOOPP’s investment fees are less than one-tenth of what is charged by some for-profit retail mutual funds.
At a time when many DB pension plans are underfunded, HOOPP is running in the black — fully funded as of the end of 2011. Having an investment strategy that aligns with the future income needs of members — coupled with professional investing, good governance and mandatory contributions by members and employers — drives HOOPP’s success.
By comparison, the average Canadian has just $60,000 in a registered retirement savings plan (RRSP) at retirement, enough to provide just $3,000 of income annually.
That’s a significant value gap, one that might force older workers to continue employment well past the age of 65.
The value of DB plans is more than just the money they pay out. The investments and administration are done for you. With other types of arrangements, it’s all about you — and not in a good way.
It’s up to you to figure out how much to set aside each payday — no one tells you how much you need to save.
You’ll need to make time in your busy life to decide how to invest your retirement savings. And if you don’t know anything about investing, you’ll need to learn — quickly.
You won’t know what your pension will be in advance. It will all depend, directly, on how well your investments have gone.
Annual fees (which can be as high as 2.5 per cent) charged by mutual funds will eat up a portion of your savings — even a fee of 1.5 per cent eats up 30 per cent of your assets over 20 years.
So, even if you are able to save up a sizeable sum, it’s now on you, in retirement, to figure out how to turn it into income. Should you roll it over into a registered retirement income fund (RRIF)? Buy an annuity? A combination of the two?
Without question, having a DB plan in place is one of the best ways to attract and retain the best and brightest.
Defined benefit takes the worry out of saving for retirement — other arrangements don’t. Instead of focusing on cutting the costs of pension benefits, perhaps we should be focusing on outcomes and encouraging more pension plans to provide an adequate level of retirement income for our retirees.
Victoria Hubbell is senior vice-president of strategy and stakeholder relations at the Healthcare of Ontario Pension Plan in Toronto. For more information, visit the blog of the Alliance for Retirement Income Adequacy at www.ariapensions.ca.