Many people – especially women – will have to work longer and live on less in retirement as a lasting legacy of the global pandemic, according to an annual survey of pension plans around the world.
The 2020 Mercer CFA Institute Global Pension Index says the recession created by the novel coronavirus delivered a stinging blow to many retirement systems, including Canada’s, as falling interest rates and surging levels of government debt added to the challenges ahead for policy makers, money managers and households.
“Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement,” wrote David Knox, senior partner at human-resource consultants Mercer and lead author of the study, published Monday.
Many of the hardest-hit people will be women. They have suffered disproportionately large job losses in this downturn because many work in sectors, such as restaurants and retailing, that have been hit the hardest by lockdown restrictions.
The gender gap in retirement preparation also reflects the fact that women have traditionally taken on the caregiver role, whether it be for children or elderly parents, said Scott Clausen, partner at Mercer Canada.
“That has typically resulted in a tendency for more women to work part-time or take breaks from their career, which reduces their ability to make pension contributions and accumulate time in a pension plan,” he said in an interview. “There is no doubt that COVID has exacerbated the situation over the last year” especially as school closings forced many children to stay home.
The report is not entirely bleak. It suggests Canada is facing the growing retirement challenge in better shape than many other countries. This country’s pension system ranks ninth out of 39 countries, the same position it held last year when the survey included only 37 countries.
Canada’s solid “B” grade in the survey puts it on a rough par with countries such as Australia, Germany and Sweden. All those nations fall behind the only two countries to earn an “A” grade – the Netherlands and Denmark – but rank ahead of the United States and Britain, both of which received “C-plus” grades.
However, no country’s pension plan is exempt from the challenges created by COVID-19, according to the report, sponsored by financial educator CFA Institute in collaboration with the Monash Centre for Financial Studies in Australia and Mercer.
A major challenge for retirement planners everywhere is the falling returns from most pension assets. Declining bond yields, reduced company dividends and lower rentals from property investments have shrunk prospective returns, the report notes.
On top of that, Canada and most other countries have run up large amounts of government debt as they struggle to support households and businesses. All things being equal, this leaves governments with less room to pay government pensions in future.
Canadian companies and governments have a few ways to address these challenges, said Mr. Clausen at Mercer Canada.
One priority should be to expand the reach of workplace pension plans to include more people.
The percentage of the labour force covered by registered pension plans has actually declined in recent years, falling from 33 per cent in 2007 to 32 per cent in 2017, according to Statistics Canada. “Two thirds of people are looking after themselves,” Mr. Clausen noted with concern.
Many employers are reluctant to take on the burden of operating a pension plan, but alternatives are emerging. In recent years, a handful of organizations, ranging from Mercer to the CAAT Pension Plan, have introduced pension schemes open to a range of eligible employers. These multiemployer plans remove the administrative and governance burden of running a pension plan from individual companies and could be one vehicle for increasing participation in pension plans, Mr. Clausen suggested.
Another idea would be to raise contribution limits to registered retirement savings plans, allowing individuals to save more for their senior years.
“It has been almost 30 years since the 18 per cent [of earned income] contribution limit was introduced,” Mr. Clausen said. “Individuals are living longer, interest rates are lower, and with COVID, return expectations are also lower. That 18 per cent isn’t sufficient any more. What was adequate in 1990 isn’t adequate in 2020.”
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