Impact looms as economic growth wanes, investments diminish and the unemployment rate sits above normal.
Just how much today's low interest rates will squeeze out of Canadian pensions remains to be seen, according to one Ontario advisor, identifying a growing concern.
“There are a lot of unknowns,” says Ottawa-based financial planner, Mark Freedman, citing the global economic turmoil, particularly in the U.S., China and Europe. “All the noise out there is confusing for the average investor. They don’t know what to believe.”
According to a study released Thursday by the Global Risk Institute (GRI) in Financial Services, Canadian pensions are suffering and will continue to do so if low interest rates persist.
The study, conducted by GRI and the Rotman School of Management at the University of Toronto, reports that pension plans at all levels (including public plans such as elderly benefits and social insurance, as well as employer-sponsored plans, individual retirement savings plans and other tax advantages) are dependent upon economic growth, business investment and higher employment. All are, in fact, compromised by low interest rates.
“Recent debates about the current low levels of interest rates in developed economies are really just the tip of the iceberg,” says Michel Maila, president and CEO at GRI in a release. “What lies beneath these low rates is ongoing anemic growth, low investment and weak employment.” (continued on Page 2.)
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These underlying issues will force pension plans into reform and require increased contributions from members and sponsors to maintain private plans, the study indicates.
“The longer it takes for economic activity and returns on investment to revert to pre-crisis levels, the more acute the challenges in our pensions sector will become,” explains Maila. “The focus on low interest rates has obscured the real issue, which is the length of time advanced economies are taking to recover to their historical rates of economic growth and job creation. Given these research findings, it is only prudent risk management to prepare for the possibility of rates remaining low for a while longer.”
Though Freedman won’t predict how long the low-interest trend will last, he recommends clients respond to the current climate by having simplified retirement plans in place with firm goals a year from now, five years from now and into retirement.
“The low interest rate is the risk and is a significant factor on returns on pension plans,” he said. “Hopefully, you (the investor) have a good plan that is diversified, you are spending within your means and not going into debt too much.”
