Amid all the worry about the boomer bubble, longer lifespans and uncertain economic conditions, it’s comforting to know that Canada’s retirement savings system ranks highly among its peers around the world.
Last year Canada managed to hang on to seventh place among 25 countries in a key annual ranking of retirement systems.
The 2015 Melbourne Mercer Global Pension Index places Canada behind Denmark, the Netherlands, Australia, Sweden, Switzerland and Finland in a ranking that considers more than 40 indicators measuring the adequacy, sustainability and integrity of pension systems covering almost 60 per cent of the world’s population.
Canada’s index value was 70 – up from 69.1 – which gave it a grade of B, the same mark it received the previous year. Denmark, with a ranking of 81.7, and the Netherlands, at 80.5, were the only two countries to receive an A. Since the index started seven years ago, Canada has ranked among the top third of countries studied.
Canada has the right building blocks, with Old Age Security, the Canada Pension Plan and Guaranteed Income Supplement, said Scott Clausen, a partner at Mercer Canada in Toronto, “and then it has the voluntary options on the employer side and RRSPs [registered retirement savings plans].”
“But,” he adds, “it doesn’t have a perfect system.”
Mr. Clausen said the countries that ranked at the top did so mainly because employers have stronger pension plans. Denmark, the Netherlands and Australia, which took the third spot this year, all have mandatory occupational plans. Australian employers, for example, contribute 9.5 per cent of an employee’s earnings, and that contribution is scaling up to 12 per cent over the next 10 years. Employees are also allowed to contribute.
“A lot of the debate [in Canada] is around defined-benefit versus defined-contribution plans, but that is probably the wrong debate,” Mr. Clausen said. “Denmark is largely DC and the Netherlands is largely DB. The issue is more around the level of contribution and whether a plan is mandatory.”
Private pension plans in Canada, meanwhile, are facing increased challenges. Mercer recently reported that the median solvency ratio of pension plans among its clients stood at 85 per cent at the end of 2015, down from 88 per cent at the beginning of the year.
There’s not much talk in Canada about forcing companies to contribute to mandatory plans, but the proposed Ontario Retirement Pension Plan, intended to supplement CPP for those without company plans, is a viable way to strengthen the system, Mr. Clausen believes.
“It would be good to find a solution that would enhance CPP because it is a well-run, cost-efficient system and gets to the question of how you provide for middle-income earners.”
The top-ranked countries generally benefit from their plans being administered as larger entities, which results in lower costs because of economies of scale.
One strength of Canada’s system is that company pension plans must be locked in when employees leave a job if they have not reached the minimum age for withdrawal. Some other countries, such as the United States, have no minimum withdrawal age, which means that the funds can be used before retirement.
A way to improve the Canadian system would be to raise limits on contributions to RRSPs, but Mr. Clausen pointed out that average Canadians still have a substantial amount of unused contribution room.
Encouraging people to work longer would be another index-booster, said David Knox, senior partner at Mercer Consulting in Australia and the main architect of the study. While this is expected to happen naturally because of increased lifespans, governments can also play a role, he said.
“We really need to encourage people to work longer and reduce future demands on government budgets,” Mr. Knox said. “Governments can encourage this, either directly with grants to employers, or indirectly through leading the discussion in the community. In addition, gradually increasing the eligibility age for benefits will lead to people working longer.”
He pointed out that countries ranked higher than Canada tend to have stronger regulations for protecting benefits and providing information to pension members.
In 2015, Canada’s sustainability subindex, which takes into account public debt and strains on government plans, fell to 56.2 from 58.6. The decline was largely because of increased life expectancies and a change in how the subindex is calculated, Mr. Knox said.
Canada’s integrity subindex ranking, which measures such things as governance and transparency, stayed the same, at 74.3. Countries with higher rankings tend to see more disclosure of information to plan members, such as how a plan is doing as a whole and more detail about what members can expect to receive, rather than simply reporting a lump sum of what has accrued. The integrity subindex also takes into account provisions for fraud or insolvency.
Canada’s adequacy subindex, which measures the ability of the pension system to provide adequate replacement income for lower-income and median-income individuals, was up to 79.4 from 75.
“But where you start to see some cracks in Canada’s retirement system is when you look at incomes between $50,000 and $100,000,” Mr. Clausen said. “That’s where the adequacy starts to drop in terms of lifestyles being maintained unless individuals belong to a workplace pension plan or are saving for their own retirement.”
“Canada is holding its own,” he added. “But there’s always room to improve.”
The Melbourne Mercer Global Pension Index ranks countries using more than 40 indicators that measure the adequacy, sustainability and integrity of pension systems.
Denmark – 81.7
Netherlands – 80.5
Australia – 79.6
Sweden – 74.2
Switzerland – 74.2
Finland – 73.0
Canada – 70.0
Chile – 69.1
Britain – 65
Singapore – 64.7
Ireland – 63.1
Germany – 62.0
France – 57.4
United States – 56.3
Poland – 56.2
South Africa – 53.4
Brazil – 53.2
Austria – 52.2
Mexico – 52.1
Italy – 50.9
Indonesia – 48.2
China – 48.0
Japan – 44.1
South Korea – 43.8
India – 40.3Report Typo/Error
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