A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/canada-expat-pensions
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
B] The Issue
It’s no surprise that people are living longer and retiring later. The Association of Canadian Pension Management (ACPM)’s annual national two-day conference held in Kelowna, BC offered Canadian pension plan sponsors, administrators, trustees, asset managers and other retirement income system leaders a look into the organizations in Canada and around the world who are employing a range of strategies to increase pension coverage and improve retirement outcomes for Canadians.
David Knox of Mercer Australia highlighted the diversity and complexity of global pension systems through Mercer’s CFA Institute Global Pension Index. He stressed the importance of learning from other countries to improve retirement income systems globally, especially as aging populations and low birth rates continue to strain pension systems.
Knox explains that pension systems can be grouped into public and private sectors, based on a four-part pillar framework developed by the World Bank. Where Pillar Zero is the state or means-tested pension, he explained, Pillar one is “what we might call Social Security or earnings-related provision,” he says. “Pillar two is where it’s mandatory or quasi-mandatory. And pillar three is where it’s voluntary, either for employers or employees or the self-employed. Those two pillars are what’s in the private sector, normally fully funded or close to them.”
As for Pillar Four, Knox asserts that while it’s important to recognize providing good financial support in retirement, things happen outside the pension system. For example, home ownership is important to provide financial security in retirement. “In some countries, you find private savings that are very high that are outside the pension system. Things like household debt is a negative, because if I retire with significant household debt, I’ve got to pay that off before I start to enjoy my retirement income. It affects my animus,” Knox explained.
This multi-faceted approach allows for a comprehensive evaluation of systems, factoring in more than 50 indicators, including adequacy, sustainability, and integrity. Knox explained the Global Pension Index ranks countries based on these three sub-indices. Adequacy measures what people receive from both public and private pensions, considering the design of the system and how well it provides for retirees. Sustainability assesses the long-term viability of a pension system, especially in the face of changing demographics. Finally, integrity examines regulation and governance, ensuring that pension systems are trustworthy and transparent.
C] Canada’s Rank
Canada currently ranks 12 out of 47 countries in the 2023 Index, with strengths in governance and adequate support for low-income retirees. However, there is still room for improvement, especially in increasing private pension coverage, which currently stands at 59 per cent of the working population, compared to an 87 per cent average in top-tier countries like the Netherlands, Iceland and Denmark.
While expanding coverage is crucial, Knox asserts that in some countries, “retirement savings need to be preserved” rather than accessed for other purposes. “In a sense, your RRSPs are savings plans, but they’re not there for retirement. If you’re going to call it retirement, money should be preserved for the future. It’s important you distinguish between your retirement and other forms of savings,” Knox says.
D] CAAT’s DB Plus and Growth Plus
The CAAT Pension Plan, a $20 billion pension fund in Canada, provides an example of innovation in the private sector aimed at improving retirement outcomes. Lilach Frenkel is the director of product innovation at CAAT Pension Plan. She discussed the organization’s transition from a sector-specific plan for Ontario colleges to a national pension solution available to both public and private sector employers. This expansion has seen the plan grow from 48,000 members in 2018 to over 100,000 members today.
CAAT’s flagship product, DB Plus, offers a Defined Benefit (DB) pension plan with fixed contributions for employers and lifetime benefits for employees. The product combines elements of both Defined Benefit and Defined Contribution plans, providing cost certainty to employers while offering stable, lifetime income for employees. Thus a CDC nature.
“The pooling of a multitude of employers and sharing of investment risk allows these plans to leverage economies of scale, offering a higher payout in retirement for the same contributions, lowering the per member fee and a bigger bang for your retirement buck. It means leveraging those collective efficiencies to have a higher payout in retirement for the same contributions remitted,” Frenkel said.
In addition to DB Plus, CAAT has introduced the Growth Plus investment account, which allows members to transfer their tax-sheltered savings like RRSPs into a CAAT-managed fund. This product caters to members at different stages of their careers and aims to provide financial flexibility alongside their pension benefits.
E] Saskatchewan Pension Plan
Expanding coverage is also a priority for the Saskatchewan Pension Plan (SPP), a Defined Contribution plan established in 1986 to serve individuals without access to workplace pensions. SPP is unique and its regulatory framework is somewhat complicated. It isn’t governed by Saskatchewan Pension legislation, but rather governed by Canadian Securities legislation. As a result, the organization has to obtain an exemption order from the Canadian Securities Administration for the registration and prospective requirements in securities legislation.
After years of operating within provincial boundaries, the SPP had most restrictions removed last year that previously limited membership to Saskatchewan residents. “We became ‘limitless.’ Anyone in Canada can now participate in the SPP so long as they earning employment income and have RRSP room,” explains Barbara Shourounis, who serves as a trustee for the Plan.
This shift has already yielded results, with a “strong uptick” in contributions from new members across the country. The SPP’s low-cost, easy-to-access model is particularly well-suited for the modern, gig economy workforce. “The money moves with members when they change jobs, which is which is key as more people are self-employed,” she explained.
The Plan’s diversified investment portfolio, managed by external professionals, has also delivered strong average annual returns of around 8 per cent in recent years. Like most pension managers, SPP plans to reach out to small businesses to set up plans for their employees.
“We will also be applying for removal of the condition in our exemption order that prohibits us from advertising outside of Saskatchewan,” says Shouroinis. “We want to reach out and seek new members from across the country.”