As the public debate about the future of pensions continues to unfold, policy-makers need to keep three factors in mind if the reforms are to make a meaningful difference in the lives of Canadians.
First, millions of Canadians are heading into retirement with no pension and little, if any, savings.
Second, will the solutions being considered provide meaningful replacement income for ordinary Canadians?
And third, any system that leaves the entire risk and responsibility of retirement income on an individual’s shoulders will fail most people.
In my view, as the leader of a multi-employer defined benefit (DB) plan—the Healthcare of Ontario Pension Plan (HOOPP)—there’s no question that a DB component must be part of the answer. Plans with a DB component offer many benefits.
There is portability if you change jobs and far lower management expense ratios than other retirement vehicles. If it’s a multi-employer plan, the responsibility for keeping the plan funded is shared.
Overall, a DB plan offers one key advantage over any other form of retirement savings—it provides an adequate income in retirement and certainty about what that income will be.
In recent years, DB plans have been replaced in many cases with defined contribution plans. With DB, the investor has a specific goal—providing plan members with a pre-set amount of retirement income. There’s no such target for other types of plans.
Education and Expertise
Our political leaders have proposed increasing investment education for Canadians and boosting financial literacy, in the hopes they can increase our collective investing expertise.
Having more financial literacy is a laudable objective. However, study after study has shown that hard-working Canadians simply don’t have the time, the interest, the foresight and, more importantly, the money at the right life stages to appropriately prepare for retirement.
Expertise adds value. Most Canadians are not experts in investing. Those who stick with fixed income investments miss out on growth. And those who venture into growth opportunities don’t know when to get out.
In the case of HOOPP, the in-house investment team averaged 5.79% returns over the last decade, adding more than $13.1 billion to the HOOPP fund. The fund is currently 102% funded—at a time when other major plans are looking at contribution increases and/or benefit reductions. The fund is able to remain focused on solely one objective—ensuring the retirement security of the healthcare sector—and can plan and make adjustments based on the best course of action for this long-term objective.
And HOOPP is able to do all this at an investment cost of 32 basis points—far less than the usual fees charged by retail mutual funds.
Do-it-yourself investing, in my view, would be like going to Canadian Tire with a smoking engine and being told to sit down for an hour with a group of other customers to discuss how to fix the problem yourself. It’s hard enough, especially in this economy, to be an expert in what you’re required to do at work—let alone to be an expert in investing.
The answer to Canada’s retirement income crisis is to put in place a system that will provide Canadians with peace of mind and meaningful adequate replacement income after they stop working. This can best be done through multi-employer DB plans where investment costs are minimized and expert investors maximize returns. BC
John Crocker is president and CEO of HOOPP. info@hoopp.com
Get a PDF of this article
© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the October 2010 edition of BENEFITS CANADA magazine.