Michel St-Germain reflects on 45 years in pension industry, challenges ahead

When looking back at his career, the biggest change he’s observed in the pension industry is what he calls a move away from employers taking responsibility for retirement. “Essentially, in the good old days, 40 years ago, employers really cared about how their employees will retire when they reach that age. They were willing to set up defined benefit plans with guarantees. They were really committed [to] making sure that full career employees — and there were more of them then — . . . would be fully provided [for] in terms of replacement income [when they reached retirement].”

The shift has resulted in a transfer of risk from employers to employees, he says. “We have tried to adapt to this.”

Specifically, he points to the expansion of the Canada Pension Plan and recent moves to improve defined contribution plans. That said, success on the DC front has been limited to the accumulation phase, he says, noting the retirement industry still hasn’t found ways to support people exiting DC plans who need to translate the accumulated savings into retirement income. “We’re still struggling on what’s the right approach to advise Canadians on that.”

To date, industry providers haven’t been able to solve the problem and the answer may be for new players, including high technology firms, to enter the decumulation space, says St-Germain. “I see a lot of young actuaries trying to develop models to be new intermediaries to that [type of] transaction.”

Further, he suggests financial planners will have a greater role to play in helping Canadians understand what to do with their savings at retirement. And he believes young actuaries also have a role to play in providing tools to financial planners.

He also raises alarm bells over the low interest rate environment. “I’m not sure if the retirement system can survive with [the] long-term interest rate, [the] so-called risk-free basis, that is below [the] inflation rate and it is the case now. If you buy long-government bonds, it yields less than inflation at two per cent. I don’t think the retirement system can sustain that.”

Retirement becomes much more expensive with low interest rates, he adds. In response, people will have to either substantially increase the amount they’re saving or decrease the pension promise, which can involve decreasing the level of benefits or increasing the age of retirement.

St-Germain notes later retirement is already a growing trend. “There is a significant increase in the age at which people effectively retire in Canada. We are still not quite where other countries are — such as Japan or the Nordic countries in Europe — but I think the low interest rate will result in that sort of thing. And frankly, it’s not really a bad thing.”

Low interest rates will also push investors to take more risk, he adds. “Why invest in government bonds at two per cent, or actually lower than that, which is below [the] inflation rate? You seek risky investments to compensate that reduction. That worries me.”

Overall, St-Germain has great confidence in the future generations of actuaries playing a role in solving the issues of the future. “If there is a need to use people good at math, people who understand an overall system to improve the system, the next generation will find a way of doing it.”