This is Part 5 in our coverage of the 2012 DC Plan Summit, held in Mont Tremblant, Que.
Read Part 2: DC plan governance
Read Part 3: DC investment insights
Read Part 4: Retirement planning and transition
The reality that Canadians are not saving enough for retirement has sparked the idea of reforming the pension system. Speakers at the 2012 DC Plan Summit discussed the recently proposed pooled registered pension plan (PRPP), changing the lifetime contribution limit and the need for increased financial literacy as strategies to encourage people to be better prepared for their post-work years.
“There is a coverage gap in Canada,” said Sue Reibel, senior vice-president and general manager, group retirement solutions, with Manulife Financial in Kitchener, Ont. “That gap is most significant for employees who work for companies with fewer than 500 employees. Ninety percent of these employees don’t have access to a registered pension plan. Some have group RRSPs, but that’s still not enough.”
Watch: Sue Reibel discusses PRPPs
The response from the federal government was the introduction of Bill C-25 creating the PRPP. One goal of this new vehicle is to simplify plan administration and legislative compliance for smaller employers. The PRPP framework also opens up an opportunity for plan design features such as auto-enrollment and auto-escalation.
However, complete details have not been finalized, said Reibel. It’s unclear which institutions will be qualified to provide PRPPs. There is also the question of whether or not the legislation will be harmonized across the provinces. Even with the current uncertainty, PRPPs may mean big changes to how larger employers can run their DC plans.
“We’re hopeful that legislation and regulations will apply for larger plans,” said Reibel. “Sponsors have long been wanting auto-enrollment capabilities beyond date of hire and an option for re-enrollment of all employees who have been employed for a while. Also, auto-escalation—nudging up contributions without having to get a signature from the employee—and more provincial alignment of regulations have the potential to change the DC landscape.”
Those employed in small businesses aren’t the only ones who have a hard time saving. Claude Leblanc, vice-president, business development, with Standard Life in Montreal, said the poor saving habits of Canadians, coupled with the low interest rate environment, means a change is needed in the pension system.
“We need to consider having a lifetime maximum instead of this annual limit of contribution.”
Leblanc argued that a lifetime maximum will reduce the inequality between those in DB and those in DC plans. It will also allow people to catch up on their retirement savings.
“Every year in which we won’t get the maximum allowable RRSP contribution means a loss of opportunity to invest in our retirement that we can never recover. We must absolutely remove those straitjackets that prevent Canadians from fully assuming control over their retirement.”
Watch: Claude Leblanc talks about the challenges of pension reform
To make this change possible, two things have to happen, Leblanc said. First, revisit the rule of nine (established in the ’80s) to incorporate the realities of today’s market. Second, tweak the tax framework so that pension plan earnings are detached from earnings.
“This means, we must not only allow the use of job-related money, but any kind of income, like inheritance, franchise rights and sales of property. If the governments are concerned about the fact that people need to have enough money to retire, they need to be able to give a framework to all Canadians to let them do so.”
In order to get Canadians to take advantage of potential changes to the pension system and their retirement savings programs in general, financial literacy needs to improve.
According to the Task Force on Financial Literacy, to be financially literate means to be financially well-behaved, said Jimmy Carbonneau, senior account manager with Desjardins Financial Security in Montreal.
“There is a disconnect between knowledge and behaviour. Eighty-seven percent of adult Canadians know what a budget is, yet less than 31% have set a retirement target and a plan to achieve it.”
Watch: Jimmy Carbonneau discusses the path to financial literacy
Over the past 15 years, plan sponsors have tried to improve the financial literacy of their members, said Carbonneau. First, they provided information that was too overwhelming. Next, sponsors created communication plans to organize the information in a meaningful manner to lead members to informed decision-making. This has evolved into today’s environment of communications.
To educate members, Carbonneau said plan sponsors should remember three Es. “We need first to entice employees by showing them the value of their benefits and getting their attention. Once we have it, we need to keep encouraging them by providing support and guidance at each stage of their retirement planning cycle,” he said.
The third is engagement, which is the ultimate goal. If sponsors have connected with members successfully, they will have created a culture of retirement awareness in which members take an active role in their plans.
Leigh Doyle is a freelance writer based in Toronto. leigh.doyle@gmail.com
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