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Defined Contribution

Canada needs to focus on DC assets, experts say

While Canada's defined benefit plan model serves for many as an example of good governance, a World Bank executive said the country needs to increase its defined contribution assets to make its retirement future more secure.

"There's an increasing divide between retirement readiness results for countries without voluntary pension plans and those with voluntary plans," Robert Palacios, global lead of the pensions and social services group at the World Bank, Washington, said in a Sept. 12 plenary session of the 2018 Association of Canadian Pension Management national conference in Quebec City. "The more opportunities there are for people, the better the retirement incomes are."

In Canada, 60% of retirement income replacement rates come from public defined benefit plans, while 35% comes from private savings and only 5% from occupational defined contribution plans, Mr. Palacios said.

"There's space for voluntary pensions" in Canada, he said, "though most don't have private pensions."

Depending on public DB plans for most of a person's retirement income puts retirees at greater risk that there might be an income shortfall given the recent rise in "sponsor risk," or the risk that a plan sponsor cannot provide full benefits that are promised or earned, Benoit Hudon, global defined benefit leader at Mercer (Canada), said at the plenary meeting. "Sponsor risk is real on the national level as well as the corporate level," Mr. Hudon said.

An example of such risk affecting a pension system is the Netherlands, where a DB culture that had been seen as sustainable is in the process of shifting to defined contribution, Mr. Hudon said.

"The current DB system there is very complex and has deficits, and no coverage for the self-employed," Mr. Hudon said. "But what is fascinating about the shift to DC in the Netherlands is that it's being driven by the unions."

Mr. Hudon said Canada has a C$3 trillion ($2.3 trillion) gap between what it needs for retirement placement and what it has in all its retirement vehicles. Of that, 75% of the shortfall comes from unfunded government obligations, 24% is from private savings vehicles like registered retirement savings plans, and only 1% from corporate plans.

Among policy changes the Canadian government should consider, according to Mr. Hudon, are changing the retirement age from the current 65 — "a no-brainer," he said — along with applying more financial technology to savings, promoting financial literacy in schools, allowing flexible drawdown options with tax benefits and addressing longevity risk in defined contribution plans.

"There's no going back to DB, even with hybrids like target benefit plans," Mr. Hudon said. In Canada, he added, "the stars are aligned to a move to DC."

While Messrs. Hudon and Palacios spoke of the need for DC growth in Canada, a separate conference plenary meeting Sept. 13 focused on using the scheduled 2019 expansion of the country's mandatory government-sponsored pension plans, the C$366.6 billion Canada Pension Plan, Ottawa, and the C$72 billion Quebec Pension Plan, Quebec City, as a way to move Canada's future work force to retirement readiness for the next decade and beyond.

Bernard Morency, senior fellow at the Global Risk Institute in Financial Services and the C.D. Howe Institute, both Toronto-based policy research organizations, said the automatic enrollment functions of the CPP and QPP "are an effective way to save for traditional workers and contract workers." But, Mr. Morency added, half of all Canadian workers will be self-employed or contract employees by 2050, which will require an entirely new way to look at savings beyond retirement alone.

With more people working well past an established retirement age in the next 15 years, Mr. Morency asked, "Why would people want to tie their savings to a goal people used to call retirement?" He added that guaranteed minimum income and better health care for people 65 and older "makes sense today, but I don't think it makes much sense in 2050 or even 2035."

Canadian society by 2050 "will have to find a way to keep people working longer," said Mr. Morency. "The keys to the success of this is the adaptability of the work force and employers to changing policies and practices. Another key will be the establishment of a welfare system to take care of some people who will be left behind, because there will be those who are left behind."

Among other changes Mr. Morency expects by 2050 are financial literary challenges solved through the use of artificial intelligence and more risk sharing between the Canada or Quebec plans and their plan participants, with benefits adjusted based on plan funding.