It’s time to get employees engaged, excited about planning, say experts
We've heard the concerns before, but the numbers are still shocking — Canada’s retirement savings deficit hit $2.7 trillion in 2015 and is expected to reach $13.4 trillion by 2050, according to a Mercer report released in July.
It’s one of the greatest crises of our time, according to Louis Gagnon, senior partner and CEO of Mercer Canada in Toronto.
“We always think of Canada as a country with a strong defined benefit environment and a good social system but, even in our environment, we’re not seeing the savings behaviours we need to see.”
And while some might question why employers should care about employees once they’ve left the workplace, there are major impacts, he said.
“If your employees are financially stressed, there are studies that show their health will be impacted… their productivity will be impacted.”
There’s generally a sense on the part of sponsors that it’s just the right thing to do as an employer, said Jamie Godfree, assistant vice-president of customer experience, group customers, at Great-West Life in London, Ont.
“That’s probably the overarching theme — they care about their employees, it’s an altruistic sense they can help them this way. But it’s also enlightened self-interest — financial stress has real costs… employees obviously who feel their employer cares are just that much more likely to be productive and engaged.”
Offering support and guidance around retirement savings can also help on the recruitment side, he said, in addition to helping people transition into retirement.
How an employer appears to employees really depends on how it manages population issues overall, said Paula Allen, vice-president of research and integrative solutions at Morneau Shepell in Toronto.
“There’s a group of people who are going to be transitioning into retirement, pre-retirees, and even if you’re a young person, how others are treated actually makes a difference in your perception of the employer, so it’s something that contributes to corporate identity.”
Retirees also go out into the community, which can impact a company’s brand and reputation, she said, and some retirees may return to the workplace.
“(Employers) might need to bring them back on a contract basis or ask for their skills and services, so maintaining that relationship is actually quite good. So how well you support people in that transition can have an impact on all three of those levels.”
Why are people so ill-prepared?
There are numerous factors contributing to the retirement savings deficit in Canada, according to Mercer — including longer lives combined with lower birth rates, a lack of easy access to pensions and savings products, a lack of trust in financial markets and products, a low-growth environment, gender imbalance in long-term savings, the trend towards self-employment, and fewer private sector workers covered by defined pension plans.
The average household saving rate was just 4.3 per cent, according to a 2017 report from Statistics Canada, said Gagnon.
“That’s clearly short,” he said. “We’re not saving as much as we need to do, we don’t know how much to save, and… we don’t know what we need to prepare for. Who can predict when we will die, what needs we’ll have in terms of expenses?”
People also just don’t pay attention to, or they postpone, retirement planning, said Allen. They have busy lives and avoid the education until it’s too late. And of course previous generations had secure pensions, which are now being closed or replaced, she said.
“There’s a lot more onus on the employee to take responsibility and know what they will and won’t get, but also make some decisions for themselves. So it’s a bit newer of a risk than it was in the past.”
However, in a lot of the ways, many Canadians are prepared, said Godfrey, citing a 2014 study by McKinsey that found about 83 per cent are on track to maintain their standard of living in retirement. But that leaves a sizeable number who are not prepared, he said.
“A lack of plan or personal savings participation is obviously the key overall theme, but the underlying reasons for that can be varied. We believe sometimes certainly there’s competing priorities, people have things they need to do, they need housing, they may potentially get married, they need all sorts of things in their lives and retirement is one among many goals that folks have.”
Often, people are unaware of important information, such as group plan details, eligibility levels or how a small change in their savings behaviour can create significant outcomes down the road, said Godfree.
There is also the “complexity and friction” of savings and retirement planning in general, with people trying to navigate their plan design forms, fund choices or contacts, he said.
“Even if you get beyond all that, there’s really critical things you need to think about, like how do you integrate all these disparate contributions and things people are doing for retirement,” he said.
“There’s disparate tools and advice and there’s lots of education… and information, but it’s very difficult to connect the dots on all those things, and the actual steps are sort of elusive about what they should actually do.”
Potential solutions
Not surprisingly, 90 per cent of HR professionals responding to a recent survey by Morneau Shepell said they are concerned workers are not adequately prepared for retirement.
“There’s increasing awareness of the whole risk in not making sure people are well-educated and well-prepared for challenges like that,” said Allen.
HR leaders are exploring a range of solutions, found the survey of 370 Canadian organizations, from providing employees with better education (58 per cent), offering them decumulation options when they retire (27 per cent), and allowing retirees to purchase insurance at discounted costs through online retiree marketplaces or other options (23 per cent).
It’s the structure of services that an employer offers that make the biggest difference, said Allen. That means providing a tool that helps employees understand how to draw down on their savings.
A lot of attention is paid to pensions on the savings end of the curve, she said, so putting away money in vehicles that give a high rate of return. But there’s very little attention paid to draw-downs, to how much people should take out in terms of having their money stretched, and to minimize fees.
“Employers can help with that because there could be calculation tools that will help people understand how much to budget to take out, as well as guide them to vehicles that have the lowest fees so their money can last longer,” said Allen.
Another option is to provide a vehicle where retirees can have similar types of health benefits that they had when they were working — even if the employee pays for it.
“People undervalue or don’t realize the value of the group plan they get when they’re working because that group model provides significant discounts, that group model means that if you have a pre-existing condition, in many cases, you’re still covered. And if you buy insurance individually, then those things may not apply. So if an employer is able to offer the benefit of extending some of those group plan features… but you pay for it yourself, that would be a tremendous way for health benefits which are hugely important the older you get.”
There’s no one-size-fits-all answer, said Gagnon, and the issue of financial security is not just about retirement but about broader financial wellness concerns that can undermine social and employment productivity.
As a solution, Mercer recommends “spurring” a consumer revolution in financial fitness, so trying to make saving an engaging consumer experience.
“We created this fitness revolution, we need to do the same on the financial side, so that people can view this as exciting, fun,” said Gagnon. “We need to simplify our language; we need to create tools that are fun and easy to use, so that we can have that revolution.”
Mercer also said individuals should know what “good” looks like, so they have the help and tools to plan for and achieve long-term savings goals.
“We need to educate way more on what ‘good’ looks like, because that’s a problem — at the moment, people don’t know really what good looks like,” said Gagnon, citing the four per cent saving average.
Another problem is employees do not trust their employers with helping them in terms of savings, he said.
“I can see where it’s coming from, because in the world of benefits, employers have tended to decrease benefits, so employees are saying, ‘Well, it’s all about the money for employers.’ So employers have a trust issue they need to rebuild.”
Designing smart systems can also help ensure adequate saving, said the Mercer report, such as making savings contributions compulsory.
“We also need to have smart systems to make sure people can start to look at their own situation and understand ‘If this is what good looks like, this is how I can adapt my own situation to get there,’” said Gagnon, citing customized default options as an example.
“We have the data analytics power and the technology to create customized defaults, and I think that needs to be considered for sure.”
Finally, work and retirement need to be redefined, according to Mercer. As societies age and the nature of work evolves, old notions of work and retirement need to give way to a spectrum of new possibilities for when and how to work, and what it means to retire.
And employers can do more when it comes to helpful tools.
Great-West Life, for example, has a new tool that strings together all the elements involved with saving, such as education, plan design, matching formula, human advice, new technologies, account aggregation, and modelling outcomes, according to Godfree.
“We’re able to form a really fast, integrated view of readiness in about five minutes or so,” he said.
The Wayfinder tool offers steps employees can do to deal with, for example, a retirement shortfall. Members can see a real dollar figure about how much they need to live in the retirement they want, and can make immediate changes consistent with the recommendations, said Godfree.
