A type of pension covering 1.1 million workers has been given a strikingly lukewarm endorsement by the people who actually run these company plans.
Defined contribution plans are retirement savings where workers make contributions and their employers provide matching funds. But when you arrive at retirement, a DC pension is not actually a pension. It’s really just a bunch of money you have to manage yourself to create retirement income that lasts until you die.
People at companies offering DC plans don’t have a high level of confidence their members will be able to do this. In an informal survey done last month for the global investment management firm Schroders, almost one in four of 102 DC plan administrators said they were slightly or not at all confident their member employees would receive the income they need through retirement.
“That’s people in the industry understanding the mismatch between the expectation [by employees] of a lifestyle in retirement and what’s likely to come from the amount being saved,” said Neil Walton, head of investment solutions at Schroders. “It’s not that people will be destitute. It’s just maybe that there’s not quite enough.”
Close to 53 per cent of survey participants were moderately confident their DC plan members would have the income they need, and just 13.7 per cent said they were very confident. This tepid level of enthusiasm about DC plans is the latest reminder of the fallibility of pensions. Today’s savvy pension plan member also saves on the side.
The overall percentage of employees who are members of employer pension plans has been steadily declining – 37.5 per cent in 2016, down from 37.8 per cent in 2015 (those are the most recent years tracked by Statistics Canada). Defined benefit plans account for about two-thirds of pensions, but this dominance is much more pronounced in government than in the private sector.
Your attention is directed to Sears Canada for a lesson on the fallibility of defined benefit pensions, which are supposed to offer payments for life based on years of service and salary. Sears went bankrupt with a pension that wasn’t fully funded, leaving pensioners with less monthly income than they anticipated. Situations such as this are rare, though. DB pensions on the whole are better than a DC because they pay a predictable amount of money every month until you die, sometimes with annual cost-of-living increases.
Schroders has developed a DC pension offering called MyRetirement Funds. Available to corporate pension plan sponsors, MyRetirement offers a way for plan members to build their retirement savings while working and then turn them into income after leaving the work force.
A majority of participants in the Schroders survey were dissatisfied with the retirement investing products available in Canada, but that doesn’t fully explain why confidence in DC plans is so unenthusiastic.
A bigger concern seems to be that people in DC plans won’t end up with the savings they need to generate sufficient retirement income. In the survey, 45 per cent of participants said the biggest challenge for their DC plan members in reaching their retirement goals was the ability to save enough money. Another 19 per cent said the biggest challenge was outliving one’s savings, while almost 16 per cent said a potential stock market slowdown or recession, and almost 15 per cent said low interest rates.
The low interest-rate problem has eased just a bit thanks to the rising rate trend of the past year, and we will likely see more of this. The stock market drop on Wednesday is a reminder that a correction is coming at some point, but this is a risk you can prepare for by using a mix of stocks and bonds or guaranteed investment certificates that reflects your age and ability to weather market downturns.
The risk of not saving enough is on you. If you have a defined benefit plan, you should receive annual statements showing the amount you can expect in retirement. If you have a DC plan, try using an online retirement calculator to see how much income your pension investments will generate in combination with the Canada Pension Plan and Old Age Security.
The federal government’s Canadian Retirement Income Calculator is a great place to start. A new retirement calculator I just heard about is available on the Ativa Interactive website. Consider yourself lucky if you have a workplace pension, but don’t be complacent.