Longer life expectancy and rollback of DB coverage leaves Canadians afraid, but plan sponsors can help allay those fears
The majority of Canadians are afraid that they will run out of money during their retirement. A survey released late last month by CPP Investments revealed that 61 per cent of Canadians share that core fear. That number grows as we consider younger Canadians and women. It highlights one of the core tensions of our time, an aging population with a longer life expectancy that may be inadequately prepared for the costs of retirement.
Frank Switzer, managing director of investor relations at CPP Investments, unpacked some of what has driven this increase in anxiety. From the recent notable impact of inflation, to the growing awareness of long-term care costs, to the lack of personal savings or high levels of personal debt there are myriad reasons why these concerns are growing. Notably, Switzer agrees with the premise that the rollback in DB pension plan access among Canadians has contributed to this growing worry. He emphasizes, however, the importance of understanding CPP benefits in helping to allay those fears.
“I agree that one of the reasons for that [worry] is the decline in the number of people enrolled in defined benefit plans and an increase in the number of people who rely on defined contribution plans,” Switzer says. “I think its interesting that this situation has been acknowledged by policymakers when the Canada Pension Plan Act was amended several years ago when the government and the provinces agreed they would increase CPP deductions from people’s paycheques in order to increase payments down the line.”
Switzer notes that someone retiring today under a usual case might expect CPP benefits to comprise 25 per cent of their retirement income. Someone working in their 20s now, however, might see CPP make up as much as one third of their retirement income. Switzer sees that increase as an acknowledgement by government of far less comprehensive DB pension plan coverage among Canadians. CPP, therefore, is being tooled up to fill that gap.
CPP, Switzer emphasizes, is just one leg in the straightforward ‘three-legged stool’ model of retirement finances. The idea is that Canadians’ retirement would be paid for by their CPP benefits, their employer sponsored pension or savings plan, and their personal savings in roughly equal proportion.
As pension coverages change, however, Switzer believes that Canadians need to take an active and informed role in their retirement plans. The survey results’ release at the start of financial literacy month was intentional, aimed at driving home the importance of planning in ensuring that Canadians don’t outlive their savings. The survey found, too, that those respondents who demonstrated a clearer understanding of their CPP benefits in retirement said they were less stressed. Knowledge about finances, Switzer says, feed confidence, which in turn feeds good decision making, creating a positive feedback loop.
Given the levels of worry identified by the survey, Switzer sees an opportunity for Canadian employers to ensure they are educating their employees about their retirement benefits. That education could include more details about the DB or DC plan that employees are enrolled in. That education can also include an explanation of CPP benefits, how they work, and what employees can expect. He sees the addition of financial wellness benefits as a significant positive step in ensuring Canadians can develop a clearer understanding of their own retirement plans.
Switzer believes that plan sponsors can help allay these worries by educating their members about their CPP benefits. Simple information about CPP, like the fact that it is inflation indexed, can help create clarity. Notably, one of the major sources of worry highlighted by the survey was the concern that CPP wouldn’t be there for people when they’ve retired.
To counter that fear, Switzer drove home the results of the most recent assessment by the Office of the Chief Actuary of Canada which found the fund as projected to be sustainable for at least the next 75 years. Education about the state of CPP, Switzer says, can help restore confidence for Canadian employees. As the Canadian population ages and expresses deeper concerns about funding retirement, Switzer emphasizes the central place of CPP in every Canadian’s future.
“CPP investments does have a role to play in helping Canadians to understand that the CPP fund is sustainable for them in the long term,” Switzer says. “I think we also want to give Canadians confidence that the fund is professionally managed and built for the long term.”
