2023 Top 100 Pension Funds Report: How to improve retirement outcomes across diverse plan member groups

The change follows another significant plan change from last year. As of February 2022, plan members are able to earn their full pension service even if they temporarily reduce their working hours, such as through a job-share or another flexible working arrangement. (Both changes were initiated by an OPTrust plan sponsor: as a jointly sponsored plan between the Ontario Public Service Employees Union and the government of Ontario, it can’t make plan text changes on its own, but responds to the requests of plan sponsors.)

Read: OPTrust improving survivor benefits for plan members’ dependent children

“We know, typically, it’s women [who are] taking time off and doing job shares or that kind of employment,” says Jesusa Chow, the OPTrust’s vice-president of member experience. “It’s a huge help in terms of recognizing the kinds of scenarios that these groups find themselves in and gives them that additional support.”

Plan members who entered a temporary part-time arrangement on or after the change took effect can now continue to make pension contributions based on their regular full-time hours to earn their full pension service and their employers will match their contributions. Alternatively, they have the option to make contributions based on their reduced hours and buy back the pension service for the hours they didn’t work after their flexible working arrangement ends. People who temporarily reduced their hours before the change were offered a special buy-back window.

It’s just one of the changes pension plan sponsors can make to improve retirement outcomes across employee and demographic groups. As employers are increasingly developing and implementing workplace diversity, equity and inclusion strategies, some are beginning to turn their attention to improving equity in retirement savings.

Different outcomes

While legislative reform has long since eliminated the possibility for pension plan sponsors to openly discriminate, gaps in retirement savings persist across gender and racial lines.

Canada’s gender pension gap was 21.8 per cent as of 2021, according to the Organization for Economic Co-operation and Development, meaning that for every dollar of pension income men receive, women receive just 78 cents. The gender pension gap tends to fluctuate year to year, but has remained in the same range.

Read: More work to be done in shrinking Canada’s gender pay gap: report

A recent analysis from Ontario’s pay equity office found that, while the gender wage gap has started to close with time, the pension gap has not. In fact, it has grown with time, from 15 per cent in 1976, according to a January 2023 analysis from Kadie Ward, commissioner and chief administrative officer of the Ontario Ministry of Labour’s Pay Equity Commission.

The reasons are complex and myriad. Women are more likely to work fewer years than men — most often to take one or more parental leaves — and are more likely to work part time, leaving them with less time to boost their retirement savings and lower contribution rates.

“Maternity leave is obviously when women take a pause in their career,” says Paul Webber, pension consulting leader at Green Benefits Group. “But with this experiment we all went through with how the [coronavirus] pandemic affected families, who was the family member that was going to make career accommodations? It ends up being women.”

All of these factors, as well as a longer life expectancy than men, contribute to a higher risk that women will experience poverty in their senior years, according to a 2017 report from the Healthcare of Ontario Pension Plan.

But the gender pension gap isn’t the only disparity plan sponsors must contend with. A 2021 report from the Canadian Centre for Policy Alternatives found Indigenous and racialized seniors have lower retirement security and higher rates of poverty than white seniors in Canada. The study, which was based on 2016 census data, found the average income was much lower for Indigenous seniors ($32,200) and racialized seniors ($29,200) compared to white seniors ($42,800).

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

It also found that, while white seniors received 33 per cent of their retirement income from workplace pension sources, those sources represented just 25 per cent of Indigenous seniors’ income in retirement and 21 per cent for racialized seniors.

Canadians from marginalized backgrounds are more likely to be in a lower income bracket, often without an employer-sponsored pension plan, which contributes to these inequities, says Sheila Block, senior economist with the CCPA and the author of the report.

According to a January 2023 Statistics Canada study, racialized people were more likely than their non-racialized and non-Indigenous counterparts to earn a bachelor’s degree or higher, but they aren’t as likely to find jobs that offer the same pay and benefits and have lower rates of unionization and pension coverage.

“Pension plans are a formula — they don’t see gender and race,” says Bonnie-Jeanne MacDonald, director of financial security research at the National Institute on Ageing at Toronto Metropolitan University. “But the numbers going in, that’s where the systemic discrimination will happen and that’s a labour issue.”

That labour issue is why Block says some of the meaningful actions employers can take fall outside of the realm of pensions. She advocates for employers to implement and support more equitable hiring processes in their organizations to ensure more Indigenous and racialized workers get in the door and have the opportunity to contribute to a pension.

Read: Changes to QPP allowing flexibility on pension contributions, retirement age: expert

She also sees value in employers calling for legislation that would enforce employment equity and for improvements to the Canada Pension Plan, old-age security and the guaranteed income supplement, on which her paper found Indigenous and racialized Canadians are more likely to rely for the bulk of their retirement income.

Who’s eligible?

One quick and easy change both defined benefit and defined contribution plan sponsors can make to reduce these inequities is taking a closer look at their plan eligibility requirements and waiting periods, says Ben Ukonga, principal at Mercer Canada and leader of the firm’s wealth business in Calgary.

Some plan sponsors enrol members only once they’ve worked a certain number of hours for the company, which penalizes women, who are more likely to engage in part-time work and therefore may take longer to qualify, he says. “Enabling them to enrol in the plan as quickly as possible ultimately improves their retirement outcomes down the road.”

In addition, some companies have a waiting period before employees can contribute to their pension, which is meant to act as an incentive for staff to stay with the company while reducing the administrative burden for the employer. But Ukonga says DB plans’ service-based accrual formulas can be an accidental source of uneven retirement outcomes, rewarding long-term employees by increasing their pension benefit based on their age and years of service. But “it has the unintended consequence of . . . providing less benefit to mid-career hires, who tend to be women and minorities.”

In DB plans, members can typically buy back years of pensionable service if they take parental leave or other leaves of absence or make those contributions while they’re on leave. But plans haven’t always allowed members to buy back service while working temporary part-time arrangements.

Read: How can pension plan sponsors help women hit their retirement readiness stride?

In addition, while it’s valuable to be able to continue making pension contributions while on leave or make catch-up contributions later, Ukonga says it ignores the fact that someone taking a months- or years-long leave may not have the funds to put towards their pension. He suggests plan sponsors extend the window of time in which members can make retroactive contributions.

The OPTrust’s new rules for temporary part-time arrangements acknowledges this income challenge by giving plan members a two-year window to apply to buy back their service at a contributory rate and then a full 10 years to finance it. “One of the really positive things is the purchase schedule,” says Chow. “You don’t have to make the payment in a lump sum. If you can’t afford to do it [right away], there’s the opportunity to pay for it with a financing arrangement.”

Tackling income disparities

One reality for pension plan sponsors to contend with is that lower-income members often aren’t incentivized to save, with many needing to prioritize their immediate expenses over retirement savings.

The OPTrust had that reality in mind when it designed its OPTrust Select plan for the Ontario nonprofit sector, which is predominantly made up of women and minority groups. Jason White, the organization’s senior public affairs advisor, says the OPTrust conducted research, polling and consultations in the sector to hear about their retirement savings offerings before setting a plan member contribution rate of three per cent, with a full match from participating employers.

Read: OPTrust Select welcomes first members

“It was what people felt was reasonable to contribute based on their income. On average, people said four per cent might change what they could afford in a month and two per cent didn’t feel like enough.”

On the DC side, automatic features like auto-enrolment and auto-escalation can benefit plan members, particularly those in lower income bands. Among employees earning less than $30,000, 88 per cent participated in a plan with auto-enrolment, compared to 47 per cent in voluntary plans.

In addition to the challenges of contributing to workplace pension plans, MacDonald says the structure of Canada’s tax system penalizes lower-income workers who contribute to registered savings vehicles. Not only do those vehicles eat into their take-home pay during their contributing years, but withdrawals as taxable retirement income result in an OAS and GIS claw back. This has likely disincentivized some employers from setting up retirement savings vehicles, she adds, “because [they] know their own employee group. If there’s no value in setting up a plan, why put in their business’s dollars?”

In 2019, MacDonald authored a report calling for the creation of a workplace tax-free pension plan, essentially a hybrid of a DB or DC pension and a tax-free savings account, which would benefit lower-income and younger workers in particular. The idea has received positive feedback from the federal government. “I think the narrative is that low-income people aren’t saving for retirement anyway. My argument is, why don’t we set up better tools so they’re at least incentivized, not penalized?”

Read: Think tank calling for tax-free workplace pension plans

While the work of addressing unintended inequities in workplace pension plans is in its early days, Ukonga notes there’s growing interest from plan sponsors. “It’s something that is definitely on their radar. I would say they’re more aware of it now and that’s the first step.”

Kelsey Rolfe is a freelance writer.

Download a PDF of the 2023 Top 100 Pension Funds Report.