What can be done to help Canadians missing pension benefits?

Each month at WP we offer a slate of articles and content pieces that go deep on a particular topic. This February, we're focusing on retirement. 

IG Wealth Management has sounded an alarm bell. Their recently published annual retirement study revealed some worrying figures around Canadians’ access to, and knowledge about, pension benefits. Only 48 per cent of non-retirees have access to a workplace pension plan of any kind. Perhaps more worryingly, the study found that only one quarter of employees with pensions know the details of their plans, even whether it’s a defined benefit (DB) or defined contribution (DC) plan. Given the huge difference between a DB plan’s income guarantees and DC plans’ largely lump-sum payouts, that knowledge gap could worsen a dire situation for many Canadian retirees.

The study found, too, that other supplements to retirement savings are in trouble. Only one-third of non-retired Canadians have a retirement plan and savings. Only 11 per cent of non-retired Canadians know how much annual income they will need in retirement, while 49 per cent say they don’t know anything about how much they’ll need. Retirement in Canada was envisioned as a ‘three-legged stool’ with CPP and OAS forming one leg, personal savings another, and employer-sponsored pension plans the third. The IG study shows that, for many Canadians, one or two of those legs have been sawn off without their knowledge, posing a new challenge for Canadians and their advisors to overcome.

“Over the last 30 years, a lot of employers have pulled back, especially on the defined benefit plans, and have shifted to a defined contribution plan…that basically is transferring the risk of your retirement income from the employer to the employee,” says Aurèle Courcelles, VP of Tax & Estate Planning at IG Wealth Management. “The problem with that is, as our survey shows, they’re lacking the knowledge required to assume a bigger responsibility in providing for their own retirement.”

Courcelles notes that for those without any kind of pension plan, it is difficult to make the intentional choice to save for retirement with each paycheque. Rising cost of living has made that choice all the more difficult in recent years. Given the rise of gig work and more frequent job and career changes, pension access has declined. Many of those Canadians electing to move jobs more often, though, don’t necessarily know how much responsibility they will bear in their own retirements.

While the survey didn’t specifically ask about what these respondents assumed about their pension access, Courcelles notes that there is a possibility that some Canadians are assuming pension access they don’t have. Since many older generations have retired with DB plans, some of those younger Canadians with DC plans may assume they will receive a similar benefit. Those without workplace pension plans may assume they have some kind of coverage, telling the survey that they simply don’t know what they have. Education matters in solving this issue, and Courcelles argues that planners can be key educators on this topic.

Those Canadians with access to a financial advisor or planner tend to be in a better position, both in terms of their knowledge and their retirement readiness. That’s been backed by the IG survey as well as other recent retirement studies. Planners and advisors can help those with pensions understand the sort of benefits they’ll get and the choices they need to make. They can show those Canadians without pensions what they need to do to save and invest for their retirements. They can answer the all-important question of ‘am I going to be okay?’ When that answer is no, planners can show their clients what has to be done to get them into the place where they will be okay.

Finding that answer will get more challenging as Canadians live longer and longer. Courcelles notes that those without any kind of pension fund are facing a high degree of longevity risk, with the possibility that a retirement that starts at age 60 could last for thirty or forty years. Courcelles’ view is that many younger Canadians are discounting that longevity risk and without input from a planner they may sleepwalk into retirement only to run out of money.

This is not a risk unique to younger Canadians, either. Courcelles notes that many retiring baby boomers face similar challenges, with less time to correct course. Those Canadians may have to face hard choices about lowering their standard of living or finding a part-time job. Average Canadians are not well equipped to project their retirement needs out into the future. The math is complicated enough, and the emotional challenge that comes with considering the unseemly parts of ageing can be too daunting. Courcelles stresses, again, the importance of planners in addressing these risks.

The challenge for the industry is that a fee based model incentivizes a focus on the wealthiest Canadians. Lower income earners, or those with fewer liquid investable assets, may be excluded by asset minimums and constraints on advisors’ time. Courcelles acknowledges that this is an issue, but notes that taking a more strategic view of these clients, their potential to accumulate, and their connections with other more ideal clients can prove beneficial for all parties involved. There is also an extent to which altruism, not the bottom line, should motivate planners to make a difference.

“I’m a tax accountant by trade, and in the accounting community we would volunteer every spring to go to seniors’ residences and homes where people didn’t have much money to file tax returns for free,” Courcelles says. “They were simple returns, but they would make sure these people goet their GST refunds and other benefits in time… There’s a sense of wanting to give back to the community that should be in play here. Take some time to give back, and it will be well served.”