Workplace pension plans such as defined benefit (DB) plans, defined contribution (DC) plans, and voluntary tax assisted private savings opportunities will continue to play an important role in supplementing retirement incomes. Of these employment plans, the evidence highlights DB as the strongest vehicle for achieving secure finances throughout retirement. Research shows that collective, workplace pension plans provide a higher return on investment than individualized approaches or private savings opportunities to saving for retirement.[19] A recent report, The Value of a Good Pension, highlighted that for each dollar contributed to a DB plan, the return on investment is $5.32 vs $ 1.70 from a typical individual approach.[20] However, the availability of these plans is declining. DB pensions remain more likely to be found in the public sector, covering only approximately 10% of private sector workers.[21]

Overall, pension coverage rates or the proportion of all paid workers covered by a registered pension plan (RPP) has declined from 42.4% in 1996 to 37.5% in 2016.[22] A 2020 National Institute on Ageing report shows that approximately 12 million working Canadians do not have access to a workplace pension plan.[23]  Canadians nearing retirement without a workplace pension plan have median savings of only $3,000.[24] Many of these Canadians will have no choice but to rely on available government administered income supports in retirement. [25] While the use of private savings vehicles like RRSPs and TFSAs are sound individual vehicles for retirement savings, more can be done to optimize their use to ensure more Canadians can afford to retire.

In 2018, the NIA along with a coalition of pension and advocates for older adults including Association of Canadian Pension Management (ACPM), Canadian Association of Retired Persons (CARP), Canadian Institute of Actuaries (CIA), Canadian Life and Health Insurance Association (CLHIA), Common Wealth, Pension Investment Association of Canada (PIAC), and notable pension expert, Keith Ambachtsheer, called on the federal government to improve the retirement income options available to retiring Canadians in DC pension plans. In a letter to the federal government, the group identified that employer or other group-sponsored collective solutions with DC pensions and other registered savings vehicles are legislatively blocked from setting up variable payout life annuity-type group arrangements for their employees. The coalition urged the government to amend the income tax regulations that prevent the creation of new collective variable payout programs that allow pension plans to pool the assets of their retired DC members – providing economies of scale, better investment management, and longevity risk protection. Most importantly, the change would allow Canadians to turn lump-sum savings into a lifetime income vehicle.

The coalition also identified that the Income Tax Act (ITA) prevented individuals from purchasing a deferred life annuity with their registered savings with a benefit commencement date beyond age 71. The coalition therefore recommended that the ITA be amended so that that the maximum allowable commencement age for a deferred life annuity be shifted from 71 to 85. This would allow individuals to cost-effectively mitigate their longevity risk by providing them with a new retirement income vehicle that could essentially provide a guaranteed income for life beginning at age 85.  Taking advantage of this retirement income option would allow an individual to use the remaining bulk of their retirement savings to be managed more flexibly during the earlier part of retirement.

Budget 2019 responded to both of these appeals, by announcing approval for the creation of advanced life deferred annuities (ALDAs) and variable life payment annuities (VPLAs).[26] ALDAs allow one to put up to 25% of qualified registered funds into the purchase of an annuity, which can start paying an income beginning at age 85, and the VPLAs provide payments based on pooled investment risk to ensure that retirees are protected against running out of income at older ages.

What Are the Issues? 

1. Pensions Can Still be Reduced as a Result of Company Insolvency
   

   There have been a number of high-profile cases where company pensions were reduced due to company insolvency and due to underfunded pension liabilities. This results in a significant pension reduction or loss for employees and retirees. Currently, the regulation of private pension plans is shared between federal and provincial governments, adding complexity to the process of resolving the issue in its entirety. There are vastly ranging opinions on what should be done and how it should be done to mitigate these risks. In Budget 2019, the Government of Canada proposed, “…to introduce legislative amendments to the Companies’ Creditors Arrangement Act, the Bankruptcy and Insolvency Act, the Canada Business Corporations Act and the Pension Benefits Standards Act, 1985 to better protect workplace pensions in the event of corporate insolvency.”[27] The budget proposed to give courts a greater ability to review payments made to executives in the lead up to insolvency and introduce changes to corporate law with the goal of increasing oversight. According to the federal government, the plan will aim to clarify in federal pension law that if a plan is wound-up, it must still provide the same pension benefits as when it was ongoing.[28] They will also allow benefit plans to fully transfer the responsibility to provide pensions to a regulated life insurance company through the purchase of annuities to improve plan sustainability.[29]

2. Lower Income Canadians Need More Optimal Ways to Save for Retirement
   

   Currently, a majority of lower-income Canadians neither have access to workplace pensions plans nor do they save sufficiently on their own for retirement.[30] When lower income Canadians do save with savings plans, it is often done in less than optimal ways. Income-tested claw-backs within benefit calculations for GIS and provincial subsidies and post-retirement taxation of savings are two particular challenges for low income Canadians. For the nearly third of retired Canadians who receive GIS, they stand to lose money by saving. While contributions to the RRSP are tax-free, the withdrawals are taxable. As a result, the GIS repayments are reduced by $0.50 for every dollar, along with reductions on other provincial income-tested subsidies.[31] While more affluent Canadians can “time” their income to minimize tax impacts, lower-income Canadians are generally in a lower tax bracket before, compared to after, retirement – and therefore actually lose by using the tax deduction associated with RRSP contributions prior to retirement. Similar to RRSPs, workplace RPP withdrawals also qualify as pension income and are taxable, resulting in reduced GIS and provincial income-tested subsidies. Lower-income Canadians, and their employers making contributions to RPPs on their behalf, face a perplexing decision to forgo government support in exchange for private savings (and reducing their current living standards), with little (or even negative) improvement in overall financial standing in retirement.

3. Canadians Are at Risk of Outliving Their Retirement Savings
   

   In 2019, 2.2% (or over 770,000) of the population consisted of adults aged 85 and older.[32] When the oldest boomers reach 85 in 2031, this cohort will increase to 4% (or over 1.25 million); when the youngest boomers reach this milestone in 2051, a further increase to 5.7% (or about 2.7 million) is expected.[33] Financing the retirement years for these Canadians will be a growing a challenge as life expectancy increases. In particular, few Canadians die in the year actuarial tables predict, this is because while actuarial tables can accurately predict population level mortality, at the individual level, they are less accurate. This creates uncertainty and a real risk of outliving one’s money. In response, Canadians often reduce expenditure on the necessities of life, which reduces their quality of life and leaves “too much” in savings or their estate when then die.

   Due to a variance in longevity, a natural risk pooling opportunity is created between those who live longer and those who die earlier than expected. This natural risk pooling principle forms the basis of collective pension plans and longevity insurance, benefitting Canadians at the individual level by ensuring that they do not outlive their retirement money. In addition, longevity insurance is beneficial at the macro-economic level as “it ensures older Canadians can contribute to maintaining aggregate demand and hence national employment levels and economic growth by consuming goods and services at rates that maintain rather than restrict their standard of living during their later retirement years”.[34] The lack of more efficient retirement income options will place stress on older Canadians, their families, and their communities to afford necessary care later in life and a greater dependency on government income-support programs. 

Evidence-Informed Policy Options

1. Protect Pensions of Older Canadians in Cases of Company Insolvency
   

   The federal government should continue to work to resolve the issue of insolvency under its own jurisdiction as well as provide guidance and incentives for the provinces to do the same. The federal government has held consultations on enhancing retirement income with the potential of making enhancements to federal pension and governance frameworks and subsequently introduced measures to deal with the issue of insolvency. The federal government can provide leadership to encourage provinces and territories to ensure that the pensions of Canadians’ are protected in cases of company insolvency.

2. Introduce a New Class of Workplace Pension Plans That Benefit Low Income Canadians to Supplement Publicly Available Retirement Income: “Tax- Free” Pension Plans (TFPPs)
   

   The Government of Canada should explore options to enable a new class of workplace pension plans that are a mirror image of current workplace pension plans with one critical difference – they target lower-income Canadian workers in particular. Rather than operating in a “registered savings” environment, this new class of pension plan would operate in a “tax-free” savings environment (after-tax contributions and pensions that do not count as income). The availability of this type of option would be especially beneficial in helping to ensure that lower income Canadians currently without pension options have better means of saving for their own retirement. The NIA’s Director of Financial Security Research, Dr. Bonnie-Jean MacDonald, explores this further in the 2019 report Filling the Cracks in Pension Coverage: Introducing Workplace Tax-Free Pension Plans.[35]

3. Work in Consultation with Pensioners, Stakeholders, and Industry on the Implementation of Advanced Life Deferred Annuities, and Variable Life Payment Annuities to Maximize Their Effectiveness
   

   As mentioned earlier, after the NIA along with pension advocates called on the federal government to improve the retirement income options in DC plans, the government responded in Budget 2019 by announcing approval for the creation of Advanced Life Deferred Annuities starting at age 85 and Variable Life Payment annuities. This is a win for Canadians in DC plans. The NIA believes these measures can offer a safe way to turn their retirement savings into lifetime pensions. But, to fully deliver on the potential of these measures, the government needs to work in consultation with pensioners, stakeholders, and industry on the implementation process to ensure it helps as many people as possible.

References

[1] Hoeppner, C. (2010). Federal poverty reduction plan: Working in partnership towards reducing poverty in Canada – Report of the standing committee on human resources, skills, and social development and the status of persons with disabilities. Available at: http://www.parl.gc.ca/content/hoc/Committee/403/HUMA/Reports/RP4770921/humarp07/humarp07-e.pdf

[2] Statistics Canada (2019). Canadian Income Survey, 2017. Available at: https://www150.statcan.gc.ca/n1/daily-quotidien/190226/dq190226b-eng.htm

[3] Government of Canada. (2018). Opportunity for All – Canada’s First Poverty Reduction Strategy. Retrieved February 10, 2019, from https://www.canada.ca/en/employment-social-development/programs/poverty-reduction/reports/strategy.html

[4] Statistics Canada. (2014). Canadian income survey, 2012. Statistics Canada Catalogue, no. 11-001-X. Available at: http://www.statcan.gc.ca/daily-quotidien/141210/dq141210a-eng.pdf

[5] Government of Canada. (2017). Income Highlight Tables, 2016 Census. Retrieved February 13, 2019, from https://www12.statcan.gc.ca/census-recensement/2016/dp-pd/hlt-fst/inc-rev/Table.cfm?Lang=Eng&T=306&S=126&O=D&RPP=25

[6] Statistics Canada. (2019). Low income measure (LIM) thresholds by income source and household size. Retrieved from https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110023201

[7] Government of Canada. (2019). Canada Pension Plan – How much could you receive. Retrieved from https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html

[8] Government of Canada. (2018). Old Age Security payment amounts. Retrieved February 13, 2019, from https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html

[9] Government of Canada. (2018). Old Age Security payment amounts. Retrieved February 13, 2019, from https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html

[10] Government of Canada. (2019). Canada Pension Plan – How much could you receive. Retrieved February 13, 2019, from https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html

[11] OECD. (2017). Pensions at a Glance 2017: How does Canada compare? Retrieved February 13, 2019, from http://www.oecd.org/canada/PAG2017-CAN.pdf

[12] Department of Finance Canada. Archived – Background on Agreement in Principle on Canada Pension Plan Enhancement. Available at: https://www.fin.gc.ca/n16/data/16-081_1-eng.asp

[13]OECD. (2017). Pensions at a Glance 2017: How does Canada compare? Retrieved February 13, 2019, from http://www.oecd.org/canada/PAG2017-CAN.pdf

[14] Government of Canada. (2018, July 1). July 1st OAS increase builds on Government’s commitment to greater support for Canadian Seniors. Retrieved February 19, 2019, from https://www.canada.ca/en/employment-social-development/news/2018/07/july-1st-oas-increase-builds-on-governments-commitment-to-greater-support-for-canadian-seniors.html

[15] Financial Services Commission of Ontario. (2018). The Three Pillars of Retirement. Retrieved July 2, 2019, from https://www.fsco.gov.on.ca/en/pensions/retirement/pages/pillars.html

[16] Healthcare of Ontario Pension Plan; Commonwealth; National Institute on Ageing. (2018). The Value of a Good Pension. Retrieved February 13, 2019, from https://hoopp.com/docs/default-source/about-hoopp-library/advocacy/the-value-of-a-good-pension-102018.pdf

[17] OECD. (2017). Pensions at a Glance 2017: How does Canada compare? Retrieved February 13, 2019, from http://www.oecd.org/canada/PAG2017-CAN.pdf

[18] OECD. (2017). Pensions at a Glance 2017: How does Canada compare? Retrieved February 13, 2019, from http://www.oecd.org/canada/PAG2017-CAN.pdf

[19] Healthcare of Ontario Pension Plan, Ryerson University’s National Institute on Ageing, & Common Wealth. (2018). The Value of a Good Pension: How to improve the efficiency of retirement savings in Canada. Retrieved February 4, 2019, from https://hoopp.com/docs/default-source/about-hoopp-library/advocacy/the-value-of-a-good-pension-102018.pdf

[20] Healthcare of Ontario Pension Plan; Commonwealth; National Institute on Ageing. (2018). The Value of a Good Pension. Retrieved February 13, 2019, from https://hoopp.com/docs/default-source/about-hoopp-library/advocacy/the-value-of-a-good-pension-102018.pdf

[21] Healthcare of Ontario Pension Plan; Commonwealth; National Institute on Ageing. (2018). The Value of a Good Pension. Retrieved February 13, 2019, from https://hoopp.com/docs/default-source/about-hoopp-library/advocacy/the-value-of-a-good-pension-102018.pdf

[22] Statistics Canada. (2018). The Daily: Pension plans in Canada, as of January 1, 2017(Publication). Retrieved August 21, 2019, from Statistic Canada website: https://www150.statcan.gc.ca/n1/daily-quotidien/180627/t002e-eng.htm

[23] Ambachtsheer, K., Nicin, M. (2020). Improving Canada’s Retirement Income System: A Discussion Paper on Setting Priorities. National Institute on Ageing, Ryerson University. Retrieved from: https://static1.squarespace.com/static/5c2fa7b03917eed9b5a436d8/t/5e41c25873b8a7233f398b72/1581367901417/Improving-Canada-s-Retirement-Income-System-Setting-Priorities_final.pdf

[24] MacDonald, Bonnie-Jeanne. (2019). Filling the Cracks in Pension Coverage: Introducing Workplace Tax-Free Pension Plans. Toronto, ON: National Institute on Ageing White Paper. Retrieved from: https://www.ryerson.ca/content/dam/nia/white-papers/filling-the-cracks-in-pension-coverage.pdf

[25] Towson, M. (2011). Pension Breakdown: How The Finance Ministers Bungled Pension Reform (Rep.). doi: https://www.policyalternatives.ca/sites/default/files/uploads/publications/National Office/2011/12/Pension Breakdown.pdf

[26]Government of Canada. (2019). Budget 2019: Investing in the Middle Class. Retrieved April 14, 2019, from https://www.budget.gc.ca/2019/docs/plan/budget-2019-en.pdf

[27] Government of Canada. (2019). Budget 2019: Investing in the Middle Class. Retrieved April 14, 2019, from https://www.budget.gc.ca/2019/docs/plan/budget-2019-en.pdf

[28] Government of Canada. (2019). Budget 2019: Investing in the Middle Class. Retrieved April 14, 2019, from https://www.budget.gc.ca/2019/docs/plan/budget-2019-en.pdf

[29] Government of Canada. (2019). Budget 2019: Investing in the Middle Class. Retrieved April 14, 2019, from https://www.budget.gc.ca/2019/docs/plan/budget-2019-en.pdf

[30] Shillington, R. (2016). An Analysis of the Economic Circumstances of Canadian Seniors (Rep.). Broadbent Institute. Retrieved from https://www.broadbentinstitute.ca/an_analysis_of_the_economic_circumstances_of_canadian_seniors

[31] Chilton, D. B. (2011). The wealthy barber returns: Significantly older and marginally wiser, Dave Chilton offers his unique perspectives on the world of money. Kitchener, Ont.: Financial Awareness.

[32] Statistics Canada. (2020). Population estimates on July 1^st, by age and sex. Available at: https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000501

[33] Statistics Canada (2017). Population Projections for Canada (2013 to 2063), Provinces and Territories (2013 to 2038). Available at: https://www150.statcan.gc.ca/n1/pub/91-520-x/91-520-x2014001-eng.htm

[34] National Institute on Ageing (2018). Re: Enhancing the efficiency of retirement income options for older Canadians. Available at: https://www.ryerson.ca/nia/news/Coalition-Letter.pdf

[35] National Institute on Ageing (2019). Filling the Cracks in Pension Coverage: Introducing Workplace Tax-Free Pension Plans. Available at: https://www.nia-ryerson.ca/reports