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Canada's much-maligned retirement income system is closer to the ideal than one might think, according to criteria in a global review for ranking how retirees will fare in their senior years.

The "common principles" of an ideal retirement system were outlined by the CFA Institute, a global industry group that hands out the chartered financial analyst (CFA) designation. A report they co-wrote with global pensions consulting firm Mercer in the spring sets out a standard for pension systems around the world – and provides a global framework for evaluating Canada's retirement income system.

Pension reform has emerged as one of the key issues in the current federal election, with all of the parties recommending big changes. The fear, broadly speaking, is that some Canadians are not saving enough and that the current system will not be able to provide everyone a secure retirement.

The CFA Institute's report doesn't compare countries directly – it sets out the criteria that can be used to evaluate the success of retirement systems. We selected five principles that had numeric targets to evaluate Canada's system.

Rating Canada's Retirement System: Five Factors



How Does Canada Measure Up?



High coverage within the private pension system

· Less than half of Canada’s workers are covered by a private pension, whether defined benefit (DB) or defined contribution (DC)
· The proportion of workers who have a registered pension plan has fallen over time, and is now about 38 per cent

If “high coverage” is defined as at least 50 per cent of a country’s workers, Canada doesn’t hit the mark


Funded assets for the future greater than 100 per cent of the country’s GDP

· The CFA Institute says a country has adequate retirement assets when those assets are equal to gross domestic product (GDP) which measures the overall size of an economy. Canada’s GDP in 2014 was about $1.7-trillion
· Canadians report they have about $2.8-trillion in private pension assets, with the CPP Investment Board managing an additional $268.6-billion

Meets standard


Mandatory contributions of at least 8 per cent of earnings

· Between employee and employer contributions, working Canadians contribute 9.9 per cent of “pensionable earnings” to CPP, or 10.5 per cent in Quebec to the Quebec Pension Plan

Exceeds standard


A basic pension for the poor of at least 25 per cent of average earnings

· The target for CPP and QPP is to replace 25 per cent of pensionable earnings up to a yearly maximum, which is based on the average industrial wage in Canada.
· The maximum earnings rate for 2015 is $53,600; giving a target “basic pension” of $13,400 annually
· The maximum income from CPP in retirement is $12,780 per year, while maximum Old Age Security is $6,778 per year – so a retiree receiving both maximums would get $19,558 per year, or more than 60 per cent of the median income
· While many workers do not receive maximum CPP/QPP, lower-income earners can also receive income from the Guaranteed Income Supplement and other programs for lower-income earners

Exceeds standard


At least 60 per cent of earnings net replacement rate for the median income earner

· The average income from for a full-time worker in in Canada is about $52,000 (more for men and less for women)– 60 per cent of which is about $30,000
· The maximum income from CPP in retirement is $12,780 per year, while maximum Old Age Security is $6,778 per year – so a retiree receiving both maximums would get about $19,500 per year, or 38 per cent of pre-retirement average income
· In order to meet the 60 per cent replacement rate target, retirees would need to use private savings, including from private pensions for workers who participate

Standard is attainable for average workers, but requires private savings or a private pension

Source: Mercer and CFA Institute, An Ideal Retirement System. (New York: CFA Institute, Future of Finance series, March 2015).

"We don't have an ideal retirement income system, but no country does," says Malcolm Hamilton, an expert on pensions and a senior fellow at the C.D. Howe Institute.

"Canada's strength in a relative context is high pensions for low income-earners but higher income-earners have to rely on their own savings for retirement income. However, meeting those savings goals is potentially easier today than 10 or 15 years ago, when RRSP contribution limits were substantially lower and TFSAs didn't exist."

A high score for Canada
The verdict? The CFA Institute's approach balances elements of retirement income benefit, risk, cost and coverage – and based on that mix of factors, Canada scores fairly well.

Compared to the "ideal" criteria, Canada's system falls short in the proportion of Canadians with access to private retirement pensions, and the extent to which workers need to save privately for retirement outside of public pensions – particularly those workers earning above the average employment income.

If this approach was used to create a report card for retirement income, Canada would likely get one or two "needs improvement" scores, and three or four "meets or exceeds expectations" marks.

In the current federal election campaign, the parties disagree on how retirement reform should be tackled. The Liberals and NDP are pushing to expand the CPP and decrease TFSA limits, while the Conservatives argue Canadians don't need more government programs, but would benefit most from higher limits on savings accounts for retirement.

With these criteria and Canada's scores in mind, it is useful to look at which segments of the population stand to win (and lose) under suggested pension reform. Expanding the CPP, for example, may increase costs for the working population as a whole – while lower-income working Canadians already meet the criteria for retirement income replacement without a CPP expansion.

Mr. Hamilton also points out that solutions to the shortfalls identified by these criteria can be "simple but silly." For example, retirement income will last longer if it starts later in life – such as at age 70 instead of 65 – meaning the replacement rate shortfall can be quickly "solved" by increasing the retirement age.

"Many of these criteria, such as the desired retirement income replacement rate, don't cross borders very well – and nobody agrees what the ideal criteria for a retirement system is," he says.

Alexandra Macqueen, CFP, teaches and writes about finance in Toronto. She is co-author, with Moshe Milevsky, of Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income For Life. You can follow her on Twitter at @MoneyGal.