According to Statistics Canada, 80 per cent of Canadian public sector workers benefit from a respectable, life-long pension.
However, for many private sector employees the quality of the pension plan available to them leaves much to be desired. The typical private sector pension plan is a defined contribution scheme, which means employees bear the risk of their investments and face the possibility of outliving their savings. Annual operating costs can reach between 1.5 per cent and 2 per cent of total pension assets for plans offered by small employers.
These fees are high compared to the large public sector pension plans that provide life-long income and cost 0.7 per cent or less of total assets to run. A cost reduction of one per cent may not seem like much, but it adds up when the capital is invested in high-return assets over decades and the cost savings result in higher life-time pension income.
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Another challenge for private sector workers is that most pension plans are locked until retirement to encourage long-term wealth accumulation. For individuals facing high short-term liquidity needs, putting money aside in a locked account is risky.
Academic evidence from the U.S. shows that employees may not enrol in their employer’s pension plan because of having their money locked in, even if the plan comes with a contribution matching scheme from the employer. Gig workers, single parents and others facing high short-term liquidity needs are the least likely to enrol.
Last but not least, there’s the high fragmentation issue in our occupational pension system. Every province sets its own rules for employer pension plans, which makes the plans difficult to manage for employers operating in multiple jurisdictions. In addition, every employer offers its own plan. This is problematic because people tend to switch employers frequently and it becomes difficult for workers to keep track of multiple pension accounts.
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As a result, pensions plan members go missing. A recent report from the National Institute on Ageing estimates there are about 200,000 missing pension plan members in Ontario alone, representing $3.6 billion of unclaimed pension assets.
There’s much to learn from other countries on how to design a more effective pension system for Canada’s private sector workers. Australia’s system of superannuation funds is a good example. Any Australian can create an account at one of the super funds and it’s possible to stay in the same fund even if one switches jobs or moves to a different state. The funds are large, invest in a wide range of asset classes ranging from listed equities to private infrastructure, and provide a standard set of investment options to their members. The funds are therefore able to cut down operating costs to 0.7 per cent of total assets or less.
Another model to learn from is South Africa’s new two-pot pension system that aims to provide both long-term efficient savings and access to short-term liquidity by splitting the savings into two pots: a liquid pot and an illiquid pot. As Nobel Prize winner Jan Tinbergen explained, in order to deal with multiple objectives one needs multiple instruments. The multi-pot approach provides one investment portfolio for each objective.
Read: NIA addressing issue of missing pension plan members with new report
New app-based innovations for the informal sector in developing countries could also provide retirement solutions for Canadian workers who aren’t employed by a single company, such as gig workers. For example, Singapore-based fintech platform pinBox Solutions Pte. Ltd. makes it possible for a household to set-up and contribute to a retirement account for a live-in maid or to tip a ride-share driver by contributing to his or her retirement account in one click via a QR code.
The vast majority of Canadian private-sector workers aren’t confident in their retirement readiness. More than 40 per cent of Canadians between the ages of 55 and 64 have put aside less than $5,000 for general savings, according to a survey conducted by the Healthcare of Ontario Pension Plan in 2024. If this system isn’t revisited now, there’s a risk of people not being able to retire or putting the burden of caring for them on the state.