2023 CAP Suppliers Report: How are CAPs evolving to meet the financial needs of different generations?

“Savings goals are very personal to employees and we build our programs around them,” says Jane Standing, senior benefits manager at Amazon Canada, noting younger employees might prioritize building up emergency savings or paying off student loans, while employees aged 40 and older tend to be more risk adverse because they’re trying to build a safety net and usually work within funds that will bring in returns.

Read: 2023 CAP Member Survey: How CAPs are evolving to address changing financial priorities

Amid rising inflation and a challenging economic climate, CAP sponsors may be facing an uphill battle convincing members of the advantages of various group savings vehicles. According to Benefits Canada’s 2023 CAP Member Survey, respondents ranked personal registered retirement savings plans (72 per cent) and personal tax-free savings accounts (64 per cent) higher than group RRSPs (59 per cent), defined contribution pension plans (53 per cent) and group TFSAs (29 per cent).

In light of these figures, a flexible approach to savings may be the best strategy for employers, says Dimitri Poliak, a principal at Normandin Beaudry. “DC savings goals can be quite different. . . . Is it now time for certain employers to flip the script and have savings as the main component of the total rewards plan as opposed to a retirement plan?”

Redefining savings for younger workers

Amazon offers a group RRSP with a three per cent employer match, which increases to four per cent after workers have been with the company for five years.

However, with generation Z and millennials still decades away from retirement, the word itself may deter these workers from setting aside a portion of their paycheque. For CAP sponsors looking to encourage plan members’ savings habits, a simple rebranding may be the easiest first step, says Kenrick Hopkinson, director of plan wellness and education for group benefits and retirement solutions at iA Financial Group.

Read: Words to use and words to lose in retirement, pension communications

“Not everyone wants to think about the future, so we want to replace the word ‘retirement’ with savings. If you make it a savings goal for individuals and talk to them about the things that are important to each individual, then you’re probably more likely to get to them [to save].”

Key in this strategy is communications and aligning employees’ savings goals with the right plans, he adds. “Are you going to get a gen Z employee to put money into an RRSP? [They’re more likely] to be attracted to a TFSA because of liquidity. The problem with [liquidity] is it’s so easy to take the money out, but you get the products that make sense [for employees].”

With more than half of new graduates paying down varying levels of student debt, there’s increasing interest in savings vehicles that allow employees to pay down debt while receiving an employer match to their group RRSP, says Shelley Sjoberg, assistant vice-president of product development and support at the Canada Life Assurance Co. Even if a younger worker has an employer match on a registered savings plan, contributing to the plan may still mean they have nothing left over to pay down their student debt, she notes, so paying off that debt may supersede their ability to contribute to retirement savings.

Read: 2023 DC Investment Forum: Silver linings for retirement savings, investment trends and younger generations

It’s important for plan sponsors to build employee trust and transparency into their workplace CAPs while catering to plan members’ interest in social responsibility, says Bita Jenab, a principal at RetirementWorks Services Inc. “[Plan members are] very wary of investing and they’re very big on responsible investing. I think plan sponsors can do a lot to gain millennials’ trust by emphasizing the unbiased nature of these investments and [reassuring them] that plan sponsors are not there to get a commission.”

With retirement many years away, younger workers are also more likely to save for short-term goals with a focus on experiences, says Poliak. “You think of the ‘Taylor Swift effect’ — her tickets [can go for] $2,000, but people are still going. I don’t think people are unaware of the importance of saving for short-term, mid-term and long-term goals, I just think they’re making an active choice to live their lives at the same time [they’re saving].”

The FHSA

The first-home savings account was introduced in the federal government’s 2023 budget, with financial institutions allowed to make it available in April.

It allows Canadians to accumulate tax-free savings, within certain limits, towards the purchase of a first home. However, for plan members looking to purchase their first homes, under-utilized group TFSAs may also represent an untapped resource. A 2021 report based on Sun Life Financial Inc.’s CAP sponsor database found, among CAP members with a TFSA, just seven per cent contributed to the account and 55 per cent of these members have invested less than $5,000.

Read: FHSA may work best in conjunction with group RRSP, TFSA

Poliak echoes this sentiment. “Once the record keepers activate [the FHSA], I think there is going to be good uptake on it. When TFSAs were first added, we didn’t see significant uptake, but . . . with the shift towards financial wellness, TFSA contributions have been increasing, [particularly] when . . . communicated correctly to employees.”

Rainy days

In addition to increasing the daily cost of living, rising inflation can also make it more difficult for workers to recover from financial setbacks.

Amazon’s emergency savings program allows employees to split their paycheques between bank accounts, automatically setting aside a portion. “If they had it in one account, they may be more enticed to use that money,” says Standing. “When they actually do need to dip into it — whether it’s for a safety net or appliance repairs — then that money is there for them.”

The program is bolstered by Amazon’s employee discounts program, which includes savings of up to 20 per cent on big-ticket items. “For example, if an employee’s fridge breaks down, they could go into their [emergency] savings plan and also get a discount. We’ve got about 3,000 vendors that we’re working with right now [in our discounts program]. It’s not just your typical things like a movie pass — those are in there — but we focus on the big-ticket items that employees really need.”

The concerns of older generations

As employees progress through their careers, their savings’ focus shifts amid changes in life and family obligations.

This year’s CAP Member Survey found respondents expect to retire at age 62.3, on average, the same as a decade ago, but down almost a year compared to 2020 and about half a year compared to 2022. It also found the percentage of CAP members who are worried they won’t have saved enough funds in order to retire continues to rise, with 50 per cent agreeing that, if they’re careful, they should be able to live independently and pay their bills. The average estimated amount CAP members think they’ll need to save by the time they retire was $1.4 million, up more than $400,000 compared to last year.

Read: Head to head: Should employees be saving for retirement or focusing on other financial priorities?

In addition to balancing the needs of their children and their elderly parents, many people in generation X also worry about the sustainability of long-term retirement income and may require a variety of savings options, says Jillian Kennedy, a partner at Mercer Canada. “[Among gen Xers,] we definitely [see] what we would consider . . . mid-life financial priorities. There are the traditional ones like saving for your kids to go to school, making sure your family is in the right neighbourhood or house or thinking about mortgage financing. [By this age,] there is definitely also a priority on retirement.”

Gen X was also the first generation to have wide-spread enrolment in DC plans and to see their savings bear the brunt of the 2008/09 financial crisis, so they’re prone to financial stress, notes Jenab. She suggests it would be prudent of plan sponsors to give these employees more education, including information on savings and investments and the advantages of a workplace plan.

For baby boomers, personal health and the financial needs of a dependant spouse are the main factors shaping their retirement savings outlooks, says Kennedy. While older employees are mainly focused on maximizing savings in their workplace retirement plans, she notes many are making use of TFSAs as a bridge to the decumulation phase.

Read: Back to basics on decumulation

“We are seeing more usage of the TFSA to transition into a time where registered money won’t be taxed as heavily. If the other generations are maybe at around a one per cent allocation to a TFSA, we’re seeing those who are transitioning into retirement increasing their [TFSA allocation] to between five per cent and 10 per cent.”

Still, there’s work to be done on the decumulation front. The 2023 CAP Member Survey found just a quarter (26 per cent) of respondents reported an excellent or very good understanding of how to convert their retirement funds into an income stream. When asked which decumulation options members would use if they were made available, 43 per cent chose to transfer their funds into a registered retirement income fund or a life income fund, while just 26 per cent said they’d keep their funds in their current workplace plan and just 21 per cent said they’d purchase an annuity.

The role of DEI in supporting employee savings

Employees’ savings habits can be shaped by cultural factors just as much as economic factors.

Based on data from the 2016 census, a 2021 report by the Canadian Centre for Policy Alternatives found white seniors’ private pension sources — such as registered savings plans and RRSPs — accounted for 33 per cent of their total income, compared to 25 per cent for Indigenous seniors and 21 per cent for racialized seniors. It also found racialized seniors are most reliant on public pensions, accounting for 40 per cent of their income, compared to white (34 per cent) and Indigenous (25 per cent) seniors.

Read: Indigenous, racialized seniors have less retirement security: report

Among younger employees, cultural factors can shape attitudes towards saving for a home, says Poliak. “[In some cultures], there’s always been an expectation that children will stay with [their parents] for a prolonged period of time, although now it’s becoming perhaps a more normative expectation across all cultures.”

In multi-generational homes, family members are pooling their resources, he says, noting this dovetails into the post-pandemic conversation around the return to the workplace. “How realistic of an expectation is it to live close to work?”

For plan sponsors, considering employees’ cultural needs are a critical part of supporting savings goals across all generations, says Sjoberg. “They need to consider [employees’] diverse cultural backgrounds and their views of what is important in terms of financial life goals and really think about having different [savings] options that meet people where they are in their lives.

“I think we’re just at the start of what is going to be a flood of accelerated change and employers really need to think about these needs more than ever before.”

Blake Wolfe is managing editor of Benefits Canada and the Canadian Investment Review.

Download a PDF of the 2023 CAP Suppliers Report.