The topic of pensions, often regarded as a headache by overburdened employees, has enjoyed a renaissance of late. That's largely because of the spotlight placed on Canada's public pension situation at the meeting of finance ministers in Whitehorse this past December. Highlighted at the meeting was the fact that 60 per cent of private sector employees do not have an employer-backed pension plan.
"There are more and more Canadians that have no pension plan at all," Ian Mair, a consultant in Towers Watson's retirement practice, told CBC News. About three million employees fall into that category, he said.
This means, of course, that if you're among the 40 per cent of working Canadians who do have a pension, it's probably a good idea to go over those HR forms hiding in your office drawer. Make some decisions concerning your retirement future, say the experts.
The face of pensions is changing in Canada — largely in the private sector. While defined benefit (DB) pension plans once were the only option available, over the past 20 years, employers have gradually moved away from DB plans. Instead, they have started using capital accumulation plans, which include defined contribution (DC) plans and group Registered Retirement Savings Plans (RRSPs), among others.
According to Towers Watson, in 2000, 23 per cent of employers offered new hires DC plans while 77 per cent offered a combination of DB and DC plans. By 2009, 52 per cent offered DC plans, and 48 per cent offered DB or another type of pension plan.
As for group RRSPs, they have been growing faster than DC plans, according to Jack Mintz, a Calgary-based pension expert and former president and CEO of the C.D. Howe Institute.
Though other factors are involved, the reason for the shift is largely a financial one. In defined benefit plans, employers bear the financial burden — the investment risk and the management of the portfolio. As a result, if there's a pension shortfall, which can happen in times of market upheaval, employers have to top up their pension plans to keep them going, often funding them through higher pension contributions from employees.
"Costs are hard to predict," Richard Shillington, social policy researcher with Informetrica Ltd., says about DB plans. "Suddenly, you [the employer] owe millions of dollars."
And pension membership can evolve over the years, compounding employers' problems.
"What we've seen in recent years is that the size of the pension plan has become disproportionate to the size of the company," says Mair. In other words, companies can end up lacking enough incoming funds — in the form of member contributions — to fund their plans.
For employees, DB plans, which are determined through an assessment of an employee's salary and length of service, are a pretty sure bet in providing a secure retirement, says Mair. That's because unless a company goes under, employees have pension protection when the times get tough.
"The whole market decline has highlighted the value of the DB plan to those who have one and the value of the plan to those who don't have one," says Susan Bellingham, vice-president and national DC practice leader with Aon Consulting in Toronto.
"While DB plans are perceived as great, the benefits are only there if the assets are there to back them up," cautions her colleague, Aon vice-president Barry Gros.
DC plans growing in popularity
Defined contribution plans, on the other hand, place the responsibility of investing the pension assets on the shoulder of employees. Employees first fill out questionnaires that assess their investment risk profile. Then, with the guidance of a company-appointed financial advisor, they make decisions about how to collectively invest their funds.
"It's primarily moving the financial risk from the employer to the employee," says Mair.
According to Bellingham, employees generally like DC plans. "There's a huge consumer push that has permeated the culture in the U.S. and Canada … wanting to have control over your assets," she said.
"From the member perspective, they get that they have a certain account balance; they can see their money every day; they know it's going up and down with the market; they know where their the investments are. They can touch it, feel it."
Bellingham says that DC plans are becoming more and more transparent through the increased availability of web-based tools that employers have introduced over the past decade. "On the DB side, it's still somewhat of a mystery," she said. "People can't see the plan balance. They don't understand what that money is going to do for their retirement income."
Unfortunately, with a DC plan, if the stock market sustains a large hit, as it did in recent years, employees can be left picking up the pieces. For example, for those employees who invested heavily in equities, the recent stock market crash would have devalued their retirement savings considerably.
Conversely, when markets are thriving, there is a large opportunity to make money in a DC plan - provided the employee has weighted their portfolio favourably.
"When markets are booming, [DB plan members] think they're falling behind," said Rob Armstrong, associate vice-president in charge of human resources at the University of Calgary.
Group RRSPs have also experienced a surge of interest in recent years. A retirement vehicle in which employees make decisions about their assets, with employers usually matching contributions to a maximum of three to five per cent of an employee's earnings, these are more flexible. "If you change jobs, you just take all of your assets with you," said Mintz.
Lack of education
Unfortunately, with both types of pension plans, education is critical — or poor choices can be made. And sadly, most employees are unaware of the value of their pensions and their responsibilities, said Bellingham.
She says for that reason, many companies are increasingly offering single diversified portfolios for the DC plan members, making the investment choice easier and ensuring that assets aren't in risky investments. They're also providing staff with as much retirement saving information as possible, in the form of calculators and other online tools that can predict optimal retirement funds for desired retirement lifestyles, and advice on how much to save to reach those goals.
For DB members, enrolment is often mandatory, though some companies have voluntary enrolment programs, often a year or two into a person's employment. Many are finding, however, that when employees have a choice to enrol, particularly those in their 20s, they fail to.
Instead, these young new hires happily gloss over the details of their pension plan, viewing enrolment as one more thing to do in a long list of new duties.
And many don't have the additional money to invest in what seems like a very long-term goal, so they don't enrol. "They're dealing with huge mortgages, student debt," says Bellingham.
The experts weigh in
Enrolling in a pension plan, even if an employee doesn't plan on a lifetime of service with the same employer, is wise, say most experts. That's because in most cases, an employee's pension can move with them if they leave the company, and in the meantime, they're having their employer match their pension contributions. Alternatively, the pension can be paid out at termination of employment.
"Take your assets with you if you move," advises Mintz.
Mintz also suggests people weigh their investment decisions carefully if they have a DC plan or other capital accumulation plan — ensuring they don't take too many risks if they're nearing retirement.
"Generally, the rule is if you're younger, it's 60 per cent equity, 40 per cent fixed income," says Mintz. "When you're younger, choose more equity."
Older people nearing retirement should be conservative, weighting more heavily toward fixed income, he suggests.
Many experts agree that getting professional advice before making any pension choices is always prudent. Talk to a pension advisor, says Mintz. "There are a lot of choices that have to be made."
The good news is that many employees are getting the message, says Gros. "People are learning they have to be accountable for their retirement income."