How could Canada's retirement income system be improved?

The system that millions of Canadians rely on for their retirement income is above average but may require reform.

That’s according to the Mercer CFA Institute Global Pension Index which looks at 47 of the world’s retirement income systems to identify weaknesses and suggest ways to make them better.

The Canadian system has a B rating and scores 70.2 overall, putting it ahead of the 62.9 global average and ahead of the United States which scored a C+ with an overall score of 63.0.

Canada’s 12 out of 47 spot puts it alongside countries including the UK, Germany, and New Zealand with a system that “has a sound structure, with many good features but has some areas for improvement that differentiates it from an A-grade system.”

The Canadian system scores a B for adequacy, C+ for sustainability, and B+ for integrity.

Wealth Professional asked F. Hubert Tremblay, principal, and senior wealth advisor with Mercer Canada for his insights into the system.

What is Canada's pension system doing well?

“One important strength of the Canadian retirement system is that it provides diversification of income sources. We have good basic national benefit (OAS), means-tested income supplement (GIS) and public pension plans (CPP and QPP) that are important components of the system and that are all adjusted for inflation. Our tax system encourages retirement savings and integrates personal savings and occupational schemes. Pension assets are significant compared to the domestic GDP and still growing with significant new contributions made each year. Occupational pension schemes are well supervised, and governance of public plans is strong.”

Where is it falling short?

“The main issue with the Canadian retirement system is the coverage of workers in the private sector. Because participation to an occupational pension plan is not mandatory, many workers do not participate in any savings program with their employer. Savings rates are too low to compensate for this lack of coverage. In this context, it is possible that Canadians will have to work longer and delay commencement of pensions from public pension plans to get better retirement income.”

Given that there are 11 systems that outrank Canada's, should we be considering reform and perhaps adopting some factors of the top-ranking ones?

“Public pension plans have been gradually improved since 2019 and will continue to be improved to address our demographic and economic challenges. These improvements are meant to provide additional retirement income to future retirees. Because more and more Canadians have accumulated retirement benefits under a defined contribution basis, one the challenge we face is to develop flexible solutions to convert the accumulated savings in retirement income.

Some products are being developed, but there is room for more other flexible and efficient products. One big challenge is also making sure Canadians understand how they can delay commencement of pensions from public plans to get improved benefits. These plans offer flexibility and guaranteed lifetime and indexed pensions. They are a wonderful tool to deal with all risks related to retirement on a collective basis. We have a lot of tools already available, but these tools have to be understood and used.”

With elevated and unprecedented risks, should Canada's next generation of retirees be concerned and what can they do to mitigate the risk?

“Canadians face important economic risks. Buying a home is more expensive than ever. Young Canadians may want to use their savings for this objective in priority. In that context, savings for retirement may not be top-of-mind early in their career. However, they must make sure to take advantage of all opportunities offered by their employer. For example, some employers will match employees’ contributions to savings programs. Employees have to find a way to get the maximum from their employer in these programs. They should ask for more flexibility to make it possible. For example, ask their employer to match contributions that they would make in their RRSP and TFSA – not only in their registered retirement plan. 

Here also, Canadians need to understand how powerful public pension plans are to help them deal with pension risks. Public pension plans are gradually playing a larger role in the financial security of Canadians into retirement. They must be optimized to get the most out of them.”

World’s best system

The top-ranked system is the Netherlands which has a flat-rate public pension and quasi-mandatory earnings-related occupational pension schemes linked to industrial agreements. Iceland and Denmark complete the top three.

“The average age of populations around the world continues to rise in many markets, mainly more mature markets,” said Margaret Franklin, CFA, President and CEO, CFA Institute. “Inflation and rising interest rates have created a new market dynamic that poses significant challenges to pension plans. We also see continued fracturing as it relates to globalization. These are just a few of the increasingly complex challenges that pension funds face that impact retirees in significant ways.”

She added that investment professionals have an important role to play in preparing people for greater involvement in their own retirement planning.

AI impact

Can artificial intelligence improve pension and social security systems and provide people a better quality of life in retirement?

The Mercer CFA Institute Global Pension Index report also considered this.

“The ongoing expansion of AI within the operations and decisions of investment managers could lead to more efficient and better-informed decision-making processes, which could potentially lead to higher real investment returns to pension plan members,” commented Senior Partner at Mercer and lead author of the study, Dr. David Knox. “AI also has the potential to improve member-engagement and help individuals make long-term decisions about their financial decisions. Both advances should improve retirement outcomes.”

However, the research also highlighted risk in AI’s involvement in the retirement income space including modeling challenges and ethical concerns as well as the need for optimal data privacy and cybersecurity.

“AI by itself is not the complete answer. There will always be a need for human oversight. Despite these risks, AI has the opportunity to deliver a higher standard of living in retirement — a worthwhile objective for all pension systems,” Knox concluded.