5 drivers of value in pooled pensions

For years, we’ve heard of the financial challenges and stresses faced by many Canadians who lack appropriate savings, whether for day-to-day living or for their retirement years.

Nearly one-half (43 per cent) live paycheque to paycheque, according to a 2019 survey by the Canadian Payroll Association, while a similar number (44 per cent) have less than $5,000 in emergency savings, according to a 2015 survey released by BMO.

Further, nearly two in five Canadians have no retirement savings, according to a 2019 report by BDO Canada.

The dark cloud of COVID

Not surprisingly, the COVID-19 virus has only worsened that dilemma as thousands of people have lost their jobs or seen major drops in working hours.

Almost one-half (44 per cent) of Canadians say that the pandemic has impacted their levels of financial stress, according to a May 2020 survey by FP Canada. And almost one-third (29 per cent) say COVID-19 has had a moderate or major impact on their ability to meet financial needs such as rent, utilities and groceries, according to a Statistics Canada report in April.

The pandemic has made more Canadians think about their future and recognize that there's a need for more sustainable, adequate and accessible retirement income — regardless of the economic climate, says Ivana Zanardo, vice president of client services at the Healthcare of Ontario Pension Plan (HOOPP) in Toronto.

COVID has provided an interesting lesson on the value of savings in illustrating the importance of having savings built up for unexpected events, along with the differences in certain segments of society, says Alex Mazer, founding partner of Common Wealth in Toronto.

“People that are of higher income have found the opportunity to save more; people closer to the lower end, in some cases, have been even further stretched and are more likely to be unemployed or take on more debt. So, I think it really underlines the importance of helping [people], especially those that are of modest income, find ways to build savings to give them a cushion and some long-term financial security.”

Workplace plans offer hope

The most effective ways for people to save is through workplace-based retirement plans as people with access to such plans are 15 times more likely to save, says Mazer. But in looking at savings rates and retirement readiness, it’s an area where people continue to struggle.

“This is just a really hard thing for people to do entirely on their own,” he says. “You often have people that don't join the plan because of inertia; you sometimes have the problem of a very complicated set of investment choices that people have a hard time navigating; and you have problems of people saving inadequate amounts for retirement.”

There's a lot of work to be done to make capital accumulation plans simpler, with better design, fewer investment choices and more automatic features such as auto enrolment and auto-escalation, says Mazer, while helping people better understand how much their savings will actually earn them in retirement income.

“There's often a big disconnect between these plans… and actually helping people understand how much income you actually need,” he says.

Making the business case

Why should this matter to employers? For one, they can avoid $15.8 billion in annual costs by addressing financial stress, according to a CPA report in 2019, as one-quarter of Canadians spend at least 30 minutes each day distracted by personal finance matters at work.

In addition, 74 per cent say that they would rather have a slightly lower salary for any pension plan (or a better one) as opposed to a higher salary and no pension plan (or a lower-quality one), according to a 2020 survey released by HOOPP.

There’s a business case to be made for employers taking on a bigger role, says Mazer.

“Workplace retirement plans should be thought of as an investment, not just a cost,” he says.

“Over and above the argument for being an employer of choice, for attraction, for retention, there's a strong argument in terms of a more productive and more innovative workforce — it's hard for your workforce to think of new ideas when they're stressed about their finances.”

In addition, there will be increasing focus from investors on metrics such as employee engagement and employee well-being as part of their investment decision, says Mazer.

“There is a trend toward a greater focus on environmental, social and governance factors in investing. And one of the factors is the human capital factor. So, are you offering a good quality set of benefits? Do your employees feel a sense of financial security? That's another element of the business case.”

Simplifying the plans

One big challenge is the retirement industry has made it too complicated for employers, he says, citing as an example, the traditional single-employer, defined benefit plan.

“There's a reason why a lot of employers are moving out of that space, both because of complexity and because of liability… Capital accumulation plans have put too much of the burden on the employer to make choices around, for example, ‘What investment choices are you going to offer?’ and things that the employer is not necessarily well-equipped to decide.”

Instead, it should be about offering simple, straightforward programs that are portable and can be moved from employer to employer, says Mazer.

“One way of doing that is having multi-employer arrangements that an employer can participate in but doesn't have to get heavily involved in administering, overseeing and setting up.”

The design of the retirement plan makes a big difference, say Mazer and Zanardo, in touting the benefits of a “Canada model” pension that involves pooled pensions instead of the typical individual approach. As an example, the cost of retirement could cost $0.31 million for the former compared to $1.2 million for the latter in assessing the total contributions required to achieve a 70-per-cent replacement rate for a worker earning $40,000 at the start of their career.

Five key drivers

The right program is designed with five value drivers: lower fees and costs, saving earlier and more consistently, investment discipline, fiduciary governance and risk pooling.

With a multi-employer plan such as HOOPP, employers don't have to worry about investment decisions, says Zanardo.

“Really, all they need to do is take deductions from their employees, send them to us every month and at the end of the year, send us their member data. That’s it, and their employees are able to participate in a world-class pension plan.”

Portability is also important, allowing plan members to move their plan from one employer to the next without the risk of higher fees, says Mazer.

“If you're a plan that moves from having a high-fee plan to having a low-fee plan, that can make the difference of several hundred thousands of dollars for a typical individual over the course of their lifetime. That's a lot of additional financial security.”

HOOPP members, for example, can continue to enjoy access to the plan features when they move from one employer to another, says Zanardo, “and continue to have access to their HOOPP pension plan… to the key features that come along with a plan, like survivor benefits, that they wouldn't have otherwise.”