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January 1, 2013
I have been working in the pension business, first as a lawyer and now as a journalist since the mid 1980s. Over the last few years it seems like rarely a day has gone by when there isn’t a media headline about pensions or pension reform.
However, Statistics Canada reports that more than 50 per cent of Canada’s working population has no form of employer-sponsored or private pension and the percentage of workers who have pension coverage has been steadily decreasing. Numerous reports have made recommendations about ways to increase pension coverage, but there has been little political consensus to date.
I asked senior pension actuaries Barry Gros (Aon Hewitt), Ian Edelist (Eckler), Ian Markham (Towers Watson) and Fred Vettese (Morneau Shepell) how they think pension plan sponsors and governments will tackle the coverage issue and other pension-related problems in 2013.
Not surprisingly, trends they identified are the next chapter in the continuing pension saga we have been writing about in Moneyville over the last year.
1. Pension coverage: All four actuaries agree that a decision has to be made in the enhanced Canada Pension Plan vs. Pooled Registered Pension Plan deadlock. Unlike several provincial premiers, federal Finance Minister James Flaherty favours the new pooled registered pension plans (PRPPs) administered by financial institutions (similar to group RRSPs).
Vettese thinks PRPPs may finally get sufficient traction with all of the provinces but Edelist isn’t hopeful. He also says that it is unlikely that voluntary PRPPs will lead to significantly enhanced pension coverage for many more Canadians.
2. Risk-shifting: Vettese and Gros say that both pension cost and pension risk will increasingly be shifted to plan members. That could mean some defined benefit plans will be converted to target benefit plans where accumulated benefits or employee contribution levels can be increased or reduced from time to time if the funded status of the plan turns out to be too much or too little to provide the target benefits.
Even where existing members are “grandfathered” in defined benefit pension plans, Markham says new members will be increasingly directed to defined contribution plans, thus creating “haves” and “have nots” in the same organization.
Related: Target benefit plans: a hybrid whose time has come
3. Bigger is better: Gros and Edelist note that size matters in the push to improve pension plan governance, performance and cost of management. As revealed in Ontario’s recently released report on pooling public sector funds and the recommendations regarding pooling municipal plans in New Brunswick, creating larger pools of pension assets is being touted as the primary way to gain cost efficiencies in a sector strapped for cash.
4. Delayed retirement: Vettese and Markham expect that delayed retirement will continue in 2013, particularly for members of defined contribution plans and people without workplace pensions. Employers will have to develop strategies to manage the labour force implications of delayed retirement such as fewer jobs for young people and “hidden pensioners” who are only working because they can’t afford to retire.
Related: Think Freedom 68, Towers Watson study says
5. Retirement transition: With the baby boomers entering the retirement zone, Gros and Vettese anticipate there will be a greater focus on educating older individuals on how they can optimally draw down their nest eggs and how they can ensure they don’t outlive their money. Insurance companies can also be expected to develop more competitive and creative annuity and other decumulation products.
Finally, Markham says financial literacy must improve, but the reluctance of many Canadians to seek expert help and the lack of financial education in school curriculums make this objective difficult to attain. Most pension plan sponsors understand the important role they can play in plan member retirement savings education, but plan members say th