Retirement savings system is falling short, CIBC boss warns

The head of one of Canada's largest banks is proposing a dramatic overhaul of the country's pension regime, arguing that average Canadians need more certainty and simplicity from their savings than existing investment tools provide.

Canadian Imperial Bank of Commerce chief executive officer Gerry McCaughey said Canada should reform the Canada Pension Plan to allow people to make voluntary contributions that are beyond what they already pay through their salaries.

The move could give many Canadians something they do not have with RRSPs and other investment vehicles tied to the markets: a predictable payout when they retire.

Much as Canadians understand exactly how long it will take to pay off their mortgage when they buy a house, average earners should have a pension system that helps them forecast how much money they will have at retirement, and allows them to accelerate their contributions, Mr. McCaughey said in a speech to the National Summit on Pension Reform in Fredericton on Tuesday night.

"It would give Canadians the choice to put aside more – a little at a time – with the confidence of clearly knowing what benefits it will bring," he said. "It would improve the future of Canadians who choose to opt in – through forced savings and no withdrawals – over the arc of 40 years."

The country faces a looming pension crisis. Persistently low market returns and the erosion of defined-benefit pensions in corporations are leaving many people, particularly those in low to medium income brackets, with less certainty about their future financial security. One analysis suggests that Canadians now in their late 20s and early 30s could see a 30-per-cent drop in their standard of living when they retire.

A stronger, easier-to-understand pension system is better for the economy, Mr. McCaughey said, which is ultimately better for banks. While he still advocates the benefits of RRSPs and tax-free savings accounts, he said CPP is more reliable and clear on how much it will provide, which encourages saving. "This is not a solution that addresses every problem and meets every need," he said. "But it's a … starting point that gets to the heart of what a large number of Canadians need most – and that's certainty of outcome."

Pushing for a greater focus on the federally run CPP is remarkable coming from one of Canada's top bankers, since the sector derives considerable revenues from investment products such as mutual funds in RRSPs.

But the suggestion comes at a time when Ottawa is concerned about falling savings rates. As Canadian companies scaled back their pension offerings over the past five years, the federal government has laid the groundwork for the creation of Pooled Registered Pension Plans, or PRPPs, which are essentially private funds operated by financial institutions. Banks and insurance companies and other financial institutions are expected to offer them once they gain provincial regulatory approval. In December, federal Finance Minister Jim Flaherty said he would work with the provinces in 2013 on ways to expand CPP for all Canadians.

Mr. McCaughey believes CPP is the best vehicle for boosting retirement savings, since it promises a certain payout on a specified date (age 65, or 60 if taken early at a reduced amount) and the contributions are committed over a long period – meaning they can't be withdrawn on a whim. This allows the funds to compound. However, banks cannot operate funds that deny customers access to their money, leaving CPP as the best option, he said.

Savings rates are falling in Canada, but home ownership is among the highest in the world. Mr. McCaughey believes this shows Canadians understand the value of putting money into a home.

"Canadians go into a mortgage knowing that if they keep up their end of the bargain – if they make their payments – they are, on a specific date in the future, going to own that home free and clear. So, over the long term, housing has proven to be an effective vehicle for future savings," Mr. McCaughey said. "Why does the home ownership system work so well? Because Canadians understand it. It's date-certain and amount-certain. It's predictable and transparent. There's good governance. And the outcomes are clear."

CIBC economists predict that Canadians now in their late 20s and early 30s can expect, on average, a 30 per cent drop in standard of living when they retire, based on current savings rates.

"We're not talking about the normal reduction in income that individuals typically see in retirement," he said. "We're talking about a real and significant decline in living standards as measured by consumption power," Mr. McCaughey said.

"Today, for many Canadians, there's a bigger emphasis placed on investing – on rates of return – than on the critical need to actually set aside money. Individuals are more focused on how they're investing their money rather than on how much they're putting away, and for how long."