The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

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December 2007

Saving For Retirement: Where Are We?

By: Peter Ridge & Annik Huet-Richard

In a society marked by a notable aging of the population (See Chart 1), where medical progress and the ambitious plans of recent retirees are leading to longer, more active retirements, encouraging individuals to take charge of their financial future is a key topic of concern.

saving retirement

However, a June 2007 study sponsored by the Canadian Institute of Actuaries (CIA) shows only one in three Canadians expecting to retire in 2030 is saving at levels required to meet basic household expenses in their retirement and many may need to sharply increase their annual savings or continue working past age 65 to avoid financial hardship. Benefits paid under the Old Age Security (OAS) program and the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) provide a modest level of income, but not enough to maintain most people’s standard of living after retirement.

In fact, individuals with an annual income of around $40,000 who retire at age 65 will only receive 37 per cent of this income from government plans, roughly $15,000 a year. Home equity can reduce this shortfall to a certain degree, but not enough. That leaves personal savings as the only way to achieve a person’s retirement goals.

saving retirement

Are Personal Savings The Answer?

Group pension plans are a key part of a company’s employee benefits. Based on a 2003 survey by SOM, 67 per cent of employees would rather have a pension plan than a pay raise. Essentially, employers who want to attract and keep key employees have no choice but to offer a pension plan.

However, merely setting up a group pension plan is not, in itself, enough to guarantee a retirement income for all employees with access to the plan. For instance, the money accumulated in group RRSPs is not locked in, meaning it can be withdrawn at any time, at the member’s discretion.

With Defined Contribution or Defined Benefit registered pension plans (RPPs), on the other hand, the accumulated contributions are lockedin, meaning the money saved under the plan cannot be withdrawn until retirement. As a result, employers who set up an RPP ensure that the money accumulated by plan members will generally be used to generate a retirement income.

The plan sponsor can also decide whether to make enrolment in the RPP mandatory or not. By making enrolment mandatory and setting minimum employee contribution levels, the plan sponsor ensures that every employee will receive a minimum amount of additional retirement income. But even under this last scenario, there’s no guarantee that the income generated will be sufficient to maintain the plan member’s standard of living after retirement. And, in the case of a pension plan where enrolment is voluntary, too many employees fail to join the plan, preventing them from receiving the additional employer contributions which has a detrimental impact on their retirement income.

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