It's hard to say whether employers or employees are the bigger problem with the country's fastest-growing type of pension plan.
Too many employees are oblivious to their responsibilities to make their defined-contribution pension plans work, and a lot of employers seem to be clueless about the problem. In the ongoing discussion about how well prepared Canadians are for retirement, DC pensions are as much problem as solution.
DC pensions are the second-best sibling of the defined benefit plan, where you get a lifetime of monthly payments pegged to your years of service with your employer and salary. DC pensions are more like savings plans – employers and workers contribute to investments that end up as a pot of money you have to manage as a retiree. How long the money lasts is entirely in your hands. There are no guarantees.
There's a greater burden on employers to run DB pensions, so it's no surprise that the number of people covered by these plans shrank 0.5 per cent in 2014 to 4.38 million. Membership in easier-to-run DC plans rose 5.8 per cent to 1.1 million people. DC plans have a comparatively modest market share for now, but their growth demands attention.
A recent presentation by people at the actuarial consulting firm Eckler Ltd. offers a discouraging view of how well DC plans are working. Both employees and employers seem to be operating under false assumptions about what the other is doing to ensure pensions are being managed and used effectively.
The Eckler presentation cites data from a Benefits Canada survey of 1,008 DC-pension-plan members and 82 companies offering DC plans. Among DC-plan members, 50 per cent agreed with the idea that their employer is ultimately responsible for ensuring they'll retire with enough money to have an acceptable level of retirement income.
Truth is, even providers of DB pensions don't have that responsibility. It's up to individuals to ensure that the various sources of retirement income they have – pensions, personal savings and government benefits – generate sufficient income. You can get to work on this question by using the Canadian Retirement Income Calculator, an excellent tool provided by the federal government.
Almost two-thirds of DC-plan members in the survey agreed that their employer has a responsibility to ensure that the investment choices they make in their pension plan are the best choices for them. Again, wrong. "They probably think the employer is auditing their investment choices, which they are not," said Janice Holman, a principal at Eckler.
The average rate of return expected by employees in the survey was 17.3 per cent, which is so disturbingly optimistic that you have to wonder if people understood what they were being asked. Ms. Holman said the median expectation was a more realistic 7 per cent, which we'll assume is an after-fee number. That means gross returns of 8 to 9 per cent will be required at a time when some experts are projecting long-term annualized net gains of 5 to 6 per cent from a diversified portfolio.
Employers in the survey seem to take pride in their pension plans. Almost 90 per cent agreed that it's important to the organization that employees retire with adequate income, and 80 per cent agreed that the financial security of employees who retire from their organization is a reflection on the company.
And yet, employers seem out of touch with what's happening in their DC plans. Ninety-six per cent of them agreed that employees have a responsibility to take an active role in their pension to ensure they can retire successfully, and 75 per cent agreed that their members are actively involved in their company pension. "I can tell you from my experience that this would not be valid," Ms. Holman said. Employers do seem to have their employees sized up properly in one respect – 49 per cent described employees as having a poor understanding or worse of how much they need to contribute to their retirement savings.
We have a bizarre relationship with workplace pensions – they're valued enough by people that the phrase "pension envy" exists, and yet people who have pensions are often oblivious to how they work. Employers aren't helping much, but maybe that's because their employees are so passive. Want more help in getting the most from your DC pension at work? The first step is to ask. Show your employer you give a damn.
Pension plan membership in Canada
Defined benefit plans have the most members, but numbers are declining. Picking up the slack are defined contribution pensions.
|Total registered pension plan members, all sectors||6,185,159||6,256,920||1.2|
|Defined benefit plans||4,401,970||4,380,386||-0.5|
|Defined contribution plans||1,036,747||1,097,211||5.8|
Source: Statistics Canada
*Includes hybrids of DB and DC