Canada in top tier but no time for complacency: Mercer
Canada’s retirement crisis is being overblown, according to one of the country’s leading actuaries.
“It’s a truth universally acknowledged that Canada has one of the best retirement systems in the world,” Malcolm Hamilton recently told an audience at a Mercer Fearless Forecast symposium in Toronto.
Canadians are in an enviable position compared to many countries, said Hamilton, a worldwide partner and consulting actuary in Mercer’s retirement, risk and finance business.
“We have virtually no poverty among senior citizens in Canada — virtually none. That’s a big change from 40 years ago when we started to develop the system that we now have,” he said.
Many Canadian seniors retire voluntarily before age 65 and continue to save money even after leaving the workforce, despite an average loss of one-half of their income, he said. And 95 per cent of Canadian retirees are satisfied with their standard of living.
“That’s a higher percentage than is found among working Canadians,” he said. “When they’re asked if their standard of living deteriorated or improved upon retirement, 80 per cent say their standard of living is as good, if not better.”
Canada ranked fourth in Mercer’s 2009 Global Pension Index, behind the Netherlands, Australia and Sweden. These countries are the poster children for defined benefit (DB), defined contribution (DC) and state pension plans, respectively, said Hamilton.
“Then we had Canada, the poster child for the mixed-model, chaotic pension system,” he said. “Given the difficulty in understanding Canada’s retirement system, it said a lot that we managed to come in the top tier.”
But that’s no reason for complacency, he said.
Canadian finance ministers agreed in December to further study three proposals to expand pension coverage: a government-administered plan with defined contributions, large, privately sponsored plans for multiple employers and an expansion of the Canada Pension Plan (CPP). British Columbia and Alberta are also working on a voluntary supplementary plan on top of the CPP.
But political pressure for pension reform in Canada could result in the wrong decisions, including extending the age at which government benefits are available, said Hamilton.
“Transferring this burden to the small, not terribly wealthy generation following the boomers is not a viable strategy,” he said.
Pension reform should target middle-aged Canadians in the private sector, where only 25 per cent of workers have a pension plan, he said. In particular, any changes should be aimed at those earning above-average incomes who need incentives to save more.
He also argued against tax subsidies for union-sponsored DB plans. That would leave taxpayers on the hook for public sector pensions while offering no guaranteed support for private, employee-sponsored plans.
Scott Clausen, a national partner of retirement, risk and finance at Mercer, said he would also like to see pension reform focus on strengthening the private sector pension system. He recommended flexible design options that include target-benefit pension plans and multi-employer plans.
Reforms should also include reserve accounts — under consideration in both B.C. and Alberta. The account acts as a separate fund to hold excess contributions.
“When not needed to secure benefits, the assets in these accounts can be refunded to the company,” he said. “The introduction of reserve accounts is crucial to both enhancing long-term benefit security for members and, at the same time, alleviating company concerns about over-funding their pension plans.”
The solution is not about guaranteeing pension benefits or giving them preferred creditor status in bankruptcy, said Clausen.
“These actions have political appeal,” he said. “But not only are they difficult to implement, they could have dangerous implications.”
The overriding principle should be strengthening private sector pension rules so they “do not need to change every time the market condition changes,” said Clausen.
The financial crisis has shown the best systems are those that cope effectively with factors beyond their control, such as diving stock markets and low interest rates, said Hamilton.
“Bad things happen to good systems,” he said. “The disappointment that we’re seeing here is the result of quite unrealistic expectations about how retirement savings systems can weather financial collapses.”
Wendy Mizuno, a national partner in investment consulting at Mercer, said she expects to see plan sponsors focus on strategic asset allocation and risk management in 2010, while also looking for ways to improve diversification.
Sponsors learned many lessons from the recent economic crisis and are likely to undertake de-risking strategies in anticipation of future downturns, she said.
“While reluctant to de-risk at the bottom of the equity market in late 2008 and early 2009, we expect that some plan sponsors will take a serious look at reducing their exposure to growth assets after the recent market surge,” said Mizuno.
Plan sponsors should closely monitor funding and learn to react quickly to market changes when making rebalancing decisions to allow for opportunistic investing, she said. Sponsors need to create a bucket of funds that can be used to take advantage of sharp discounts in a market downturn.
Danielle Harder is a Whitby, Ont.-based freelance writer.
