Employed clients who don't ask the right questions could be 'leaving money on the table,' say experts
While 2022’s significant volatility and market declines hurt investors’ portfolios last year, Canada’s pension plans finished the year in a solid position.
According to the latest Mercer Pension Health Pulse (MPHP), the median position, on a solvency basis, of the defined-benefit pension plan in Mercer’s database finished the year at 113%, up from 103% at the beginning of the year. Around four fifths (79%) are estimated to be in a surplus position on a solvency basis – versus 61% at the end of 2021 – and 16% have solvency ratios between 80% and 100%.
“In 2022, the stock market went down, causing pension assets to decline,” says Ben Ukonga, principal and leader of Mercer’s Wealth Business in Calgary. “But because interest rates went up drastically, DB plan obligations decreased.”
While DB plans appear to be in a good financial position right now, he says that could change with a significant economic shock. That means plan sponsors have to understand and be comfortable with the specific risks they’re exposed to, and find the optimal way to spend their risk budget.
The past year’s struggles also appear to be causing a shift among Canadian employee plan members. From his vantage point, Ukonga is seeing signs of an increased appreciation of pensions as a pillar to support future financial freedom, as well as greater focus on financial wellness overall.
“We're seeing more concerted efforts to pay down debt, and more individuals taking advantage of employer-sponsored programs that have matching features,” he says. “While younger individuals in the past might have thought that retirement is so far away, now they’re paying more attention to their employer plans as they recognize they can’t necessarily rely on the national system to take care of them in 50 years’ time.”
In a new report by Questrade and Leger, which draws from an online poll of roughly 1,500 Canadians conducted in November, only one fourth (26%) of respondents said they were contributing to their workplace pension. The largest frequencies of contribution were among residents of Quebec (36%), 35- to 54-year-olds (30%), and those earning more than $100,000 annually (38%).
Johanne Plamondon, certified financial planner at Raymond James, says workplace pensions are a crucial area for people to understand. “The workplace pension can represent a large portion of their overall retirement income, depending on how long they’ve been with the plan,” she says.
The type of pension plan can make a huge difference, Plamondon says. Because defined contribution plans are invested in the stock market, the income they generate is dependent on market performance and therefore not as predictable as income from DB plans.
“I find that not all employees are aware of what their companies provide,” she says. “If they're new, they may not necessarily know that there is a pension plan. … They might be eligible, but not all firms make enrolling their employees mandatory. So I always urge people who are new to their organizations to see what’s available.”
According to Ukonga, not all pension plans come with automatic enrolments features, and even then, employees may not maximize the employer matching contributions by relying solely on the auto-enrolment features. To maximize their benefit, plan members may want to dial up their contributions – if they can afford to.
“People should be asking themselves if they’re leaving money on the table,” he says. “Does their employer-provided plan have a matching program that they could, and maybe should be opting into?”
In Plamondon’s view, automatic contributions are beneficial for workers who might not be inherently motivated to pay themselves first. “I think more companies should take the onus to [implement automatic contributions],” she says. “Some organizations would rather not even go there because they think it’s a liability, and they don’t have the expertise. But I think that’s a mistake, because employees could be missing an opportunity to be in a very good savings strategy.”
Because not all pension plans are created equal, she also encourages workers to do their due diligence. The collapse of Sears and Nortel show what could happen to loyal employees who count on a company for their retirement, only for it to go bankrupt with an underfunded pension plan.
“I think part of our role as advisors is to help employees understand the viability of their pension plans. It’s well within an employee’s right to ask their employer how well-funded their plan is,” she says.
“As advisors, we should also help our clients understand the different buckets of income in their retirement, including their workplace pension, OAS and CPP,” she adds. “Are those enough to fulfill a retirement income strategy? If not, we have to talk further.”
