Amid low interest rates and a slow economic recovery, the income of capital accumulation plan (CAP) members in Canada has declined significantly over the past few years, new figures reveal.
The is according to Eckler’s CAP Income Tracker, which measures the replacement income a member can anticipate when retiring from a typical CAP—a registered pension plan that allows members to make investment decisions among two or more options offered within the plan. A member’s replacement income ratio declined from 88% in 2006, when the CAP Income Tracker begins, to 61% as of June 30, 2013.
“With interest rates at extreme low levels and multiple market meltdowns, pension plans have been under tremendous pressure over the past decade,” says Janice Holman, a principal at Eckler. “Just as defined benefit pension plans have seen their funding levels slip, so, too, have CAPs—but less obviously, as CAPs don’t typically measure the income they fund.”
Most CAPs—which include DC plans, deferred profit sharing plans, RRSPs and tax-free savings accounts—were created in the mid-to-late 1990s and early 2000s. That was a period of moderate interest rates and stable equity returns, which provided a very comfortable retirement income for most CAP members, explains Holman. “What is shocking is how quickly the story changed,” she says. “In a mere five years, replacement income ratios fell by more than 30% and have remained there.”
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