Given the importance of measuring benefit adequacy and retirement readiness, Fidelity Investments recently conducted a comprehensive study of retirement readiness trends in Canada. Launched in October 2007, the Fidelity Retirement Index puts a number on how prepared Canadians are for retirement.
How Prepared are Canadians for Retirement?
The Fidelity Retirement Index uses selfreported financial data from more than 2,200 working Canadian households, including income levels, current retirement savings levels, ongoing monthly retirement savings levels, pension plan participation, expected retirement dates and other sources of expected retirement income.
Unfortunately, the numbers for Canada are not promising. The Fidelity Retirement Index shows that the median Canadian household is on target to replace only 50% of its preretirement income at the date of its projected retirement. Without significantly increasing retirement savings, some Canadians could be facing a 50% pay cut in retirement.
An Index score of 50% does not paint a picture of Canadians being well-prepared financially for retirement, especially given the longer retirements that many Canadians can expect. More active lifestyle expectations in the early retirement years, together with higher healthcare costs later in retirement, can significantly increase what Canadians will need in retirement. This is particularly notable for retirees without substantial home equity and those with home equity who are not prepared to downsize their housing.
Particularly disappointing is the gap between what people think they should be doing to prepare financially for retirement and what they are actually doing. The Index scores show that many Canadians are not saving enough for retirement, yet almost 40% of respondents indicated that they believe they will be able to maintain their pre-retirement lifestyle in retirement. Their reasons for not saving enough include too much debt, purchasing a house, starting a family and high levels of taxation. One in five respondents indicated that procrastination was a reason for not doing enough.
The regional/provincial variations were relatively small, but did reveal some interesting results: Quebec had the highest regional score at 53%, the Atlantic provinces and Saskatchewan/Manitoba followed with 52%, Ontario tracked the national median of 50%, while British Columbia scored 47% and Alberta scored 45%.
In addition to differing levels of personal income, it appears that interprovincial migration does play a role in preparation for retirement. Older persons in British Columbia are especially well-prepared, reflecting the likelihood that those who are financially well-prepared for retirement are also in a position to migrate to more desirable retirement destinations, such as B.C.
Migration by a different age group may go a long way in explaining Alberta’s paradoxical Index score. Despite the buoyant economy, Alberta has the lowest Index scores in the country. This can be explained by the fact that, in addition to higher household incomes, the province has attracted young workers from across Canada, who are now putting down roots and establishing homes and are, at least temporarily, delaying saving for retirement.
More telling was the Canadian score in comparison to similar studies carried out by Fidelity in other countries. Canadian results exceed those in Japan and equal those in the U.K., but are significantly lower than those in Germany and the United States. Perhaps the most surprising result is the wide gap in Index scores between Canada and the United States, whose most recent Index score was 58%. The recent U.S. Pension Protection Act (passed in 2006) may widen this gap further in the future.
Implications for the Canadian Pension Industry
The low level of financial preparedness for retirement in Canada does not necessarily reflect badly on Canada’s employersponsored retirement programs. Retirement programs—along with other private retirement savings such as those inside personal RRSPs—are only one part of the Canadian retirement system, the others being CPP/QPP and OAS/GIS. Moreover, the contribution of a retirement savings program to a person’s financial preparation for retirement is also strongly influenced by the length of time she is in the program and the contribution level the member may set (where applicable).
While retirement planning ultimately starts and ends with individuals, they can be positively influenced along the way. This does not mean that plan members can abdicate their responsibilities. But with help from their employers, plan providers and governments they can improve their planning and savings, which could lead to a better-funded retirement.
Getting employees to take action, including enrolling in their company plan and educating themselves about retirement, will help address the low retirement savings rate. While many plan sponsors offer their employees retirement savings programs, these programs can be hindered by plan member inertia. Many plan sponsors are challenged in the first step—ensuring that eligible employees sign up for the company plan. The struggles do not end there, as many employees default to money market funds for their savings and do not increase their savings over time. The U.S. Pension Protection Act addresses many of the issues by encouraging the use of automatic features, including enrollment in the plan, ensuring that appropriate investment choices are made and escalating the members’ savings rates over time.
Governments across Canada are also taking action to address the changes in retirement. The federal government introduced measures addressing some of these changes in the March 2007 budget. These measures include pension income-splitting and increasing the RRSP age limits. They also allow defined benefit plan members to continue to work and accrue benefits while receiving a portion of their pension, which was a hindrance for some. These measures will work to address the looming labour shortage by encouraging older workers to remain in or re-enter the workforce. While some work has been done to address issues for the pension industry, there’s still more to be done, including clarifying ownership of plan surpluses, increasing limits on employers’ funding and benefit levels, and ensuring a balanced and realistic accounting treatment.
The Index results indicate that Canadians’ retirement readiness needs significant improvement. The burden of doing so shouldn’t—and can’t—be shouldered solely by retirement plan sponsors or any other single group. Rather, it must be a joint effort by governments, employers, the financial services industry and individuals.
The Fidelity Retirement Index results act as a wake-up call for plan sponsors, pension providers and members. Fidelity intends to re-survey and update the Index each year, in order to assess the progress of Canadians. Looking forward, there’s one thing we can predict with certainty: future results will be affected by the actions and inactions taken today by the pension industry and our constituents.
Methodology In Canada, the Fidelity Retirement Index is based on a survey of more than 2,200 Canadians working full-time, 25 years or older, reporting household incomes of $20,000 a year or more, married/partnered with individuals who are also not yet retired, and are the financial decision-makers in their household. The survey was conducted for Fidelity by Richard Day Research, Inc. in February 2007. Index calculations are driven by Fidelity’s asset-liability modelling engine, which generates the percentage of potential pre-retirement net income that each individual household surveyed is likely to replace upon retirement. The Index represents the median of the individual household percentages produced. The data were weighted to reflect the national and regional distribution of Canadian households with employed workers based on Statistics Canada data. For full methodology and survey data, go to www.fidelity.ca. |
Dave McLellan is vice-president, retirement services, Fidelity Investments, and Peter Drake is vice-president, economic and retirement research, Fidelity Investments. dave.mclellan@fmr.com; peter.drake@fmr.com
For a PDF version of this article, click here.
