Sigmund Freud, the Viennese psychoanalyst, developed the concept of “penis envy”. He purported it to be an early stage in female psychosexual development, when a young girl feels anxiety when she realizes she doesn’t have a penis. (Imagine.) A dubious concept, at best. However, envy is common among both genders—and nothing generates more of it than defined benefit pension plans.
Speaking from personal experience, I know the feeling of being a pension plan “have-not”. Some of my retired in-laws have defined benefit pensions and they live pretty stress-free lives, financially-speaking, knowing that no matter if the stock markets go up or down, their incomes are safe and rising with the cost of living. In contrast, my husband and I are more at the mercy of the markets and we must have a larger emergency fund in cash to cover basic costs in the event of a severe market downturn as we saw in 2008. We know that our income (and our spending) in retirement may fluctuate with the performance of our investments.
The gold-plated defined pension plan guarantees a secure and regular payout to pensioners— and it is as rare today as the white rhino. Fewer employees are members of these plans—and, with the rise of the “gig economy” and contract work, 60 per cent of workers have no company-sponsored pension plan whatsoever. It’s no surprise that, in combination with higher living costs and less secure employment, Canadians are highly concerned about the state of their retirement savings.
In a recent survey conducted by HOOPP (Healthcare of Ontario Pension Plan) and Abacus Data of 2,500 Canadians, a large majority believe there is an “emerging retirement income crisis” and that it will reduce the quality of life and affect the general economy. In fact, 8 out of 10 Canadians would prefer to have a company managed pension plan over a salary increase. Also, as a challenge to defined contribution pension plans which come with an undefined benefit in retirement, (returns based on market performance, not employee/employer contribution levels), most would prefer a pension that guarantees a percentage of their working income in retirement.
In Canada, the most common retirement savings investment product is the mutual fund. Our country has some of the highest mutual fund costs for retail investors in the world, upwards of 250 basis points (2.5%). While this might not seem like a lot, it is huge. Over time, these higher costs compound and seriously cut into total returns.
According to HOOPP, by going it alone, the average Canadian has to spend 4-times as much to match the return from a group pension plan. For each dollar invested, an individual would get $1.70 back in retirement, compared to $5.32 if they belonged to a group plan. (Or, to put it another way, a solo individual would have to save up $1.2 million in a retirement account vs $310,000 if she belonged to a plan.) These are compelling numbers.
According to David Coletto, CEO, Abacus Data, women are more likely to be concerned about pensions, with affordability and income security being the key issues. This isn’t surprising given that women, on average, live longer and earn less than men. A McKinsey study found that widowed women were the most impacted by the pension issue.
As Canada’s population continues to age with fewer workers supporting more seniors and the high costs of living make it difficult to save for retirement when we’re living paycheque-to-paycheque, together with the steady erosion of workplace pensions, government and business will have to work together to ensure the dignity of future retirees.
For example, some Commonwealth nations have implemented portable pension plans that allow workers to easily move their plan among employers. Another option is to de-link plan management from an employer and have it run by a third-party.
For those who have the good fortune of being enrolled in a defined benefit pension plan, they should appreciate what a great value a guaranteed payout in retirement really is. For everyone else, we need to become more financially aware to understand how much we will need to save in order to maintain a reasonable standard of living in retirement—and we need to push governments, businesses, and the investment industry to make saving for retirement more affordable and universal.