A new report argues that the retirement-income vehicle is most ideal given current challenges
The final quarter of 2018 was woeful for Canadian defined-benefit (DB) plans, which saw record gains wiped out by falling bond yields and negative equity returns. Still, they ended the year with respectable solvency levels.
That’s surely welcome news for Canadian retirees that stand to benefit most from such plans, according to a new report prepared for the Canadian Public Pension Leadership Council.
Citing 2018 data from Statistics Canada, The Social Implications of Pensions noted that among the 37.5% of Canadian workers with workplace pensions or retirement savings plans, 25.2% have a DB plan, 6.7% have a defined-contribution (DC) plan, and 5.6% are in other types of schemes. Among those in the public sector, 80% have a DB plan, compared to only 9.5% of those in the private space.
“There is consistent evidence that DB plans are the best option for providing Canadians with reliable, predictable income security during retirement,” the authors said. They referred to a report from RBC Insurance, which found 62% of Canadians are concerned about outliving their retirement savings. While workers in DC plans and those saving through RRSPs and TFSAs shoulder longevity risk on their own, those in DB plans “don’t need to worry about outliving their savings; their basic pension will be paid each month until they die, whether that’s 10 years away, 40 years or beyond.”
The report also highlighted the fact that more than 40% of employees face both health challenges and financial worries, according to Willis Towers Watson, and that such workers show the highest rates of absence, presenteeism, stress, and disengagement; nearly one third also plan to work past retirement, until at least age 70.
Because they are the most efficient way to deliver pension income per dollar of contribution, the study suggested, DB plans are ideal to reduce worker’s stress, pare health benefit costs, and raise employee engagement and productivity.
“In 2016, the Canadian Public Pension Leadership Council commissioned Ipsos Reid to survey 1,000 Canadians from across the country on their thoughts and attitudes toward retirement,” the report said, noting that respondents across all age and income groups indicated willingness to meaningfully contribute their income for features associated with modern DB plans.
Based on an analysis of workers enrolled in different retirement-income programs, the report found that a worker in a DB plan can receive a pension up to 2.2 times greater than one who contributes the same amount in an RRSP savings program. It also found the highest income replacement ratios were achieved by DB plans at any given earnings level.
