Canada fourth in pension index

Although the state of private pension plans in Canada seems to be improving, government reforms are needed to ensure their sustainability, said Scott Clausen, a Toronto-based principal for consulting firm Mercer.

“What we have seen is that the funded position of plans has started to rebound from their lows earlier in the year,” he said. “It’s important for governments to act to try to deal with this issue of encouraging companies to fund their plans by allowing them greater access to surplus if they over-fund their plan.”

Legislative change is just one of the pension recommendations outlined in the inaugural Melbourne Mercer Global Pension Index, which compared the retirement income systems of 11 countries, scoring them on a scale of 100 for adequacy, sustainability and integrity.

Canada, with a score of 73.2, ranked fourth on the list. The Netherlands (76.1) took top spot, followed by Australia (74) and Sweden (73.5). (See sidebar for complete list of scores.)

But the news was better for Canada when it came to adequacy of benefits — second place, trailing only the Netherlands. The report measured adequacy based on the benefits provided to poor and median income earners.

Canada scored 76.2 out of 100 in the adequacy category based on the level of minimum public pension and the relatively high net replacement rate of income for median income earners.

However, the country dropped to the fifth spot in both the sustainability and integrity indexes. Participation in private pension plans and the level of pension assets (expressed as a percentage of gross domestic product) were two factors used to calculate the sustainability index. The integrity index was based on the strength of private sector pension systems.

“The prevalence of private pension plans in Canada continues to decrease for employees working in the private sector,” said Clausen.

Companies cannot do much to improve the system on their own, he said, and long-term changes require government intervention.

“To a large degree, it does require government action in setting up a separate trust that employers can use to fund the deficits, knowing that if they over-fund them, those assets can be returned,” he said.

While there have been minor changes to pension regulations, none of those changes would encourage companies to fund more than the minimum going forward, he added.

Although the top ranked countries displayed elements of strong pension plans, none are in the “A-grade” classification, said David Knox, a principal at Mercer in Melbourne..

“The fact that no country achieved an A-grade classification confirms that no one system is perfect or currently robust enough to withstand the challenges presented by an aging population,” he said.

“By examining common and desirable characteristics of a retirement income system, lessons can be learned by governments to help them better prepare for demographic change and ensure older citizens have access to adequate incomes in retirement.”

The index revealed when the market falls, everyone is susceptible, regardless of the plan format and design, said Clausen.

“All plans are facing difficulties,” he said. “But, what’s important is, things are starting to improve.”

Pension tips

Improving pensions

The Melbourne Mercer Global Pension Index outlined a number of changes that would improve the state of Canadian pensions.

• Increase the level of coverage of employees in occupational pension schemes, possibly through a more efficient system.

• Introduce a mechanism for ensuring voluntary retirement savings are preserved for retirement purposes.

• Introduce a mechanism to increase the pension age as life expectancy increases.

• Increase the level of household savings.

National rankings

How 11 countries scored (out of 100)

Source: Melbourne Mercer Global Pension Index