Moving from DB to DC may have helped absolve plan sponsors from massive pension burdens, but it’s not working out so well for their employees.
“DC plan members are not where they need to be,” said Janice Holman, a senior investment consultant with Eckler, at Benefits Canada’s recent Benefits & Pensions Summit in Toronto.
Blair Richards, CEO of Halifax Port ILA/HEA Pension Plan and Trust Funds, added that the three-pillar retirement system isn’t enough for most Canadians.
The first pillar, old age security (OAS) is really about providing an income floor, which replaces about 13% of the average industrial wage, he said.
The second pillar, the Canada Pension Plan (CPP), replaces about 25% of the average industrial wage. While the maximum annual benefit is $12,150, the average benefit is $6,400.
The third pillar is comprised of tax-assisted savings plans, like registered pension plans and RRSPs.
However, not everyone has a pension or is saving enough.
Half a million private sector employers that employ 7.6 million Canadians don’t offer a pension plan. And among employers with less than 100 employees, only 10% offer a pension.
And RRSPs were supposed to be a cornerstone of the third pillar, but savings in that retirement vehicle are low, Richards noted.
He provided some statistics to support his argument: at the end of 2011, unused contribution room was $680 billion; the average RRSP lasts only seven years before being cashed out, and the average balance for a 60-year-old was $60,000.
“What we’re seeing now in the research is a problem,” Richards noted.
A 70% income replacement ratio in retirement requires a 12% contribution rate, but the actual rate is 5%.
Still, employers can help their employees reach their goal.
Holman noted that opt-in DC plans have a 40% participation rate while a mandatory plan with an opt-out had a 90% participation rate.
“Inertia is huge in these plans,” she said, adding that plan sponsors shouldn’t be afraid to help their members.
All the articles from the event can be found on our special section: 2014 Benefits & Pension Summit Coverage.