The prospect of ongoing pension reforms has been a hot topic as of late; as politicians, economists and business leaders grapple with the many challenges associated with an aging population and ever-increasing demand on our healthcare system and for other social services. Moreover, Canada’s strong standard of living means that future retirees can expect to enjoy a longer, healthier, more active retirement lifestyle as compared to previous generations – but who pays?

Government benefits

Canada Pension Plan (CPP) was never intended to fully fund one’s retirement lifestyle expense, but rather be a supplement to employer-sponsored pension benefits and personal retirement savings. In its present form, Canada Pension will fund a maximum pension ($960/month) income of only 25% of average pre-retirement earnings ($47,200/annum.) CPP in combination with Old Age Security ($526.85/month) will approximate just 40% of the average wage – a stark contrast to the 70% of pre-retirement earnings generally considered to be necessary to preserve one’s standard of living...

Proposed reforms

While various proposed reforms weigh the pros and cons (and related costs) of perhaps an expanded CPP, other potential solutions focus on the private sector – Pooled Registered Pension Plans for instance, have also been tabled in an effort to support the more than 11 million (62%) Canadian workers currently without an employer-sponsored pension benefit. Disconcerting (too) is that a percentage of the total workforce, fewer workers today enjoy participation in employer-sponsored pension plans as compared to 20 years ago – a more than a 15.5% decline in pension plan participation overall is most certainly a reflection of how economics has challenged all forms of employer-sponsored benefits.

Pension Benefits – Guaranteed or Not?

Moreover, while the majority of Canadian employer-sponsored pensions (especially those in the public sector) are in fact defined benefit (DB) plans, increasingly employers are opting for defined contribution (also referred to as “DC” or money purchase plans) or are foregoing traditional pensions all together in favour of Group RRSPs in an effort to limit funding obligations, liability and cost.

Notwithstanding demographics, liability and cost, return on investment will always also be a factor in determining a pension’s financial health – market and economic uncertainty (past, present and future) have/could manifest in underfunding. While legislation does allow for employer-sponsored plans to make up for funding shortfalls (over time,) a bankruptcy and/or corporate restructuring of a company-sponsor could potentially result in reduced benefits for plan members.

Left to our own devices

Vancouver again has earned the title “world’s most liveable city,” though also one of the most costly in terms of lifestyle expense and as percentage of income required to service mortgage and related household indebtedness – perhaps these facts offer some additional insight (beyond the usual market and/or economic pretext) as to why only 31% of (Canadian) taxpayers eligible to contribute to RRSPs (for the benefit of their own future retirement lifestyle) actually do so? In fact, despite its lucrative tax subsidy, unused RRSP contribution room carried forward is now in excess of $500 billion; representative of more than $150 billion of unclaimed personal tax relief!

Self-administered “Defined Benefits”

While the prospect of perhaps an expanded CPP has been borne out of a need to shore up retirement funding for all Canadians, for those with a vision of retirement beyond that which is generally supported by government benefits alone, the onus is theirs to allocate sufficient additional personal savings in support. Notwithstanding the various demands on one’s cash flows (as above,) recurrent market volatility and economic uncertainty both, can at times, impede progress toward this end. Moreover, investing too conservatively may also threaten the achievement of one’s retirement goals; which is perhaps why “defined benefits” appears to be the favoured approach for future reforms…

Unique to Canada Pension Plan is that related “defined benefits” are actually guaranteed-funded – retirement incomes are payable for life regardless of market or economic conditions. Retirement benefits are also adjusted (to some degree) for inflation. However, just as with employer-sponsored defined benefits plans, commuted value (representative of the current valuation of all expected benefits payments) is not in fact guaranteed (though may be insured) – upon passing of a CPP pensioner and/or passing of the last eligible surviving spouse, benefits payments cease.

When all’s said and done however, an assurance of lifetime income is a key virtue of defined benefit pensions. A virtue which can (now) in fact be replicated with one’s personal savings – a Variable Annuity for instance is one such example, and provides for not only a guaranteed minimum income-for-life, but offers the potential of both capital appreciation and increasing cash flows, though without surrendering commuted values, flexibility, liquidity or control. Moreover, when tapped for non-registered savings, income earned from within a Variable Annuity contract enjoys the lowest income tax inclusion rate; thus Variable Annuity solutions are generally considered to be appropriate for all types of registered and non-registered savings accounts, corporations and trusts...more

Conclusion

When considering annually, the $29 billion of foregone tax revenues related to the deductibility of RRSP and workplace pension plan contributions as compared to (just) $2.9 billion of offsetting tax credits needed to service ongoing CPP contributions (at current levels,) it seems likely that pension reforms once ironed-out, will point in the direction of an expanded CPP. Ultimately, however, a combination of both public and private sector solutions, as well as encouraged increased personal savings is likely necessary to make even a dent in the looming retirement shortfall.

Let us help you ensure you get the most from your retirement savings strategies; both through optimization of your personal savings and integration with Government benefits and where applicable employer-sponsored pensions, Group Retirement Savings Plans solutions. Please contact us to arrange for a comprehensive personal financial assessment and to explore financial solutions well-suited to your needs today and your retriement vision ahead... 

Dale Swan, CSWP, CFP, FMA, FCSI

ScotiaMcLeod Wealth Advisor

Life Underwriter

ScotiaMcLeod Financial Services

Direct: 604-661-7455

Toll-free: 1-800-263-8637

Fax: 604-661-7494

dale@swanprinciple.ca

dale_swan@scotiamcleod.com

ScotiaMcLeod
650 West Georgia Street

Suite 1100, PO Box 11615
Vancouver, BC V6B 4N9