FEWO Committee Report

The third pillar of the retirement income system is tax-assisted private savings in RRSPs and employer-sponsored registered pension plans, or RPPs. Officials from the Department of Finance told the Committee that:

These plans help Canadians bridge the gap between public pension benefits and their retirement income goals. The deferral of tax on savings in registered pension plans and registered retirement savings plans is a valuable benefit that encourages and assists Canadians to save for retirement, as it allows individuals to grow their savings more effectively compared to savings outside of registered plans. The contribution and benefit limits for RPPs and RRSPs are designed to permit most individuals to save enough, over a 35-year career, to obtain a pension equal to 70% of pre-retirement earnings. The RPP and RRSP limits are integrated and provide comparable savings opportunities to Canadians whether they save in an RPP, an RRSP or a combination of both.[30]

A. Saving for Retirement

The Committee heard that benefits from the first two pillars of the retirement income system currently provide up to $15,000 to $20,000 a year in lifetime retirement income. However, as Mr. James Pierlot, Senior Consultant, Towers Perrin told the Committee: “In most parts of Canada, $15,000 to $20,000 is not enough to have saved for a comfortable retirement.”[31] The Committee has heard that most Canadians save too little, too late.

The federal government provides tax incentives to encourage saving for retirement, through mechanisms such as the RRSPs. The Committee has heard, however, that most Canadians do not take full advantage of this mechanism. Mr. Pierlot echoed the views of several witnesses when he told this Committee that “women in Canada are saving less than men, even though they need to save more. They cannot save as much as men because they don’t make as much as a proportion of income earned. This means that women are more likely to experience poverty in retirement than men are.”[32] Women’s lower average incomes make it difficult for them to save for retirement on their own. As Monica Townson pointed out, “[a]ll this of course is going to be reflected in the kind of incomes women can expect to get when they finally leave the paid work force.”[33]

The Committee asked witnesses to comment on whether better financial education of Canadians would ensure that more Canadians save for their retirement. Most witnesses acknowledged that financial education is important. Mr. Terence Yuen , Senior Economist, Canadian Research and Innovation Centre, Watson Wyatt Worldwide pointed out that, unlike Canada, some countries, including the United Kingdom and Australia, do have mandatory financial education in their curriculum. The Committee acknowledges that financial education can help Canadians better understand what their income will be in retirement, and therefore make more informed choices about financial planning for retirement. Better education can improve Canadians’ financial literacy and promote saving. The Committee urges the government to explore effective strategies to encourage Canadians to save for their retirement.

While financial education is important, the majority of witnesses did not feel that, by itself, it would be particularly effective. Mr. Edward Whitehouse, Head of Pension Policy Analysis, Social Policy Division, (OECD) pointed out that:

[T]he literature on behavioural economics, which has become very fashionable these days and deals with how people make decisions in that area, demonstrates that even people who are fully informed and fully financially educated actually make all the wrong choices. There's a whole long list of things with technical names like “myopic loss aversion”, and so on, that suggests people actually do not make rational financial choices. [34]

Witnesses suggested that making informed investment decisions for retirement is complicated. They have pointed out that, while Canadians in defined benefit plans are largely spared from making complex investment decisions about their savings, those who rely on private savings require much more sophisticated knowledge to make informed investment decisions and manage risk. Mme Nathalie Joncas of the Confédération des syndicats nationaux (CSN) pointed out that:

It was clear that even the largest investors found it very difficult to get through the economic crisis. How can we expect ordinary Canadians, regardless of their age, to make sound planning and management decisions? Retirement planning must be a collective endeavour. [35]

The brief submitted by Towers Perrin identified the various ways that defined contribution plans and RRSPs can go wrong as follows:

• You might outlive your savings;
• You might lose your savings due to poor investment choices;
• You might have to draw on your retirement savings when the markets are down;
• You might not have saved enough for the standard of living you want; and
• Your costs might be higher than you thought they would be.[36]

The witness representing Towers Perrin went on to identify that Canadians don’t save enough, don’t invest well, and continue to hold high-risk investments in retirement. While financial education can help address these issues, most witnesses suggested that more proactive measures are required to make it easier for Canadians to save for retirement. Mr. Edward Whitehouse of the OECD suggested the importance introducing default investment strategies. As we will see in Chapter 5, a number of policy proposals are currently being actively discussed in Canada to develop such default strategies.

B. Registered Retirement Savings Plans(RRSPs)

Women derive an increasing amount of their retirement income from RRSPs. The Department of Human Resources and Skills Development Canada reported that RRSP income has increased from representing 11.6% of women’s income in 1990 to 27.3% in 2005. The Committee has also heard that there has been an increase in RRSP contributions for both men and women since the 1980s, noting that:

The proportion of women aged 35 to 39 contributing increased from 9% in 1981 to 31% in 2001. During that time period, the proportion of men aged 35 to 39 contributing rose from 21% to 38%. So although there remains a gap between men and women, it has been narrowing significantly over time.[37]

Witnesses told the Committee has heard that most Canadians invest less in an RRSP than the amount to which they are entitled. Officials from the Department of Finance noted that at the middle and lower earnings levels over 90% of people have unused RRSP room. Even among higher earnings levels, there are many earners who have unused RRSP room. For example, 70% of those who earn more than $125,000 have unused RRSP room.

While emphasizing the importance of saving for retirement, a number of witnesses identified problems with the RRSP system. Mr. Pierlot of Towers Perrin summarized these problems as follows:

Most people can't use it; they pay very high fees; when they get into later career after they've gone through a period of doing child care or what have you, they often can't save enough; if they've lost money in the markets, they can't contribute more to catch up.[38]

Although not specifically a retirement income vehicle, the new Tax-Free Savings Account allows Canadians to save. Some of these savings could be used in retirement. As the Committee identified in Chapter 2, low-income Canadians who are eligible for the GIS are heavily penalized for drawing money from RRSPs. The Committee was pleased to note that the new Tax-Free Savings Accounts will provide low-income Canadians with a savings vehicle from which they will be able to draw without being penalized with a decrease in their GIS benefit.

Recognizing that the average life expectancy of Canadians is increasing the Committee recommends:

Recommendation 5

That the government explore the possibility of allowing a more gradual withdrawal of amounts from the Registered Retirement Income Fund (RRIF).

C. Employer-sponsored Registered Pension Plans (RPPs)

The two main types of employer-sponsored registered pension plans (RPPs) are defined benefit (DB) plans and defined contribution (DC) plans.

Defined benefit plans are pension plans that specify either the benefits to be received by participants or the method for determining those benefits (based on factors such as the participant’s age, salary and years of service). In contrast, defined contribution plans are pension plans in which the employer’s contributions are fixed, usually as a percentage of compensation, and allocated to specific individuals. The pension received by an employee in a DC plan depends in part on the investment returns earned.

Defined benefit plans provide more predictable lifetime benefits, generally based on years of service and usually as a fixed percentage of salary. While they are desirable for employees, they are complex and risky for employers, particularly given the economic environment in recent years. It is therefore recommended:

Recommendation 6

That the government adopt a pension plan protection bill applicable to employers under federal jurisdiction as soon as possible so that the pension benefits of retirees or future retirees are not reduced.

Witnesses noted a decline in defined benefit pension plans, particularly in the private sector. According to witnesses from the Department of Human Resources and Skills Development Canada “DB coverage has declined from 43.5% in 1979 to 30.6% in 2006, while coverage in defined contribution plans has grown from 2.4% in 1979 to 6% in 2006. In 2006, 32.3% of women in the labour force were members of a defined benefit plan compared to 29.1% of men.”[39]

The gap between the proportion of women and men covered by RPPs has closed, although this is primarily due to the fact that coverage among men has decreased significantly. Witnesses from the Department of Human Resources and Skills Development Canada noted that the proportion of men in the labour force, who were members of a registered pension plan, fell from 52% in 1979 to 37.5% in 2006.[40] During that period, women’s coverage increased slightly from 36.1% to 38.9%. The RPP coverage rate among women surpassed that of men in 2007. Women are also catching up to men in the length of time they contribute to an RPP. The Committee heard that, “by 2017, 33% of women aged 65 will have contributed to an RPP for at least 15 years compared to 36% of men”.[41]

Mr. Terence Yuen, Senior Economist, at Watson Wyatt Worldwide noted that “[t]his trend is driven both by increasing participation of women in the labour force and by revisions to pension legislation that require employers with pension plans to include part-time workers.”[42]

As the table below indicates, however, women with pension coverage in Canada still earn less on average than men. Since pension benefits are generally commensurate with earnings, it is likely that women will continue to draw less revenue from employer-sponsored pensions than men.

Tax filers aged 25 to 54: Distribution by earnings and percent within earnings  Groups with pension coverage, Canada 2006

	Women			Men
	Distribution	% within earnings		Distribution	% within earnings
	across earnings	group that has		across earnings	group that has
Earnings	groups (col %)	pension coverage		groups (col %)	pension coverage
Less than $10,000*	32.4%	4.4%		18.9%	2.9%
$10,000 to $19,999	14.6%	17.5%		10.0%	9.6%
$20,000 to $29,999	13.6%	33.3%		10.5%	18.3%
$30,000 to $39,999	12.7%	50.2%		11.9%	30.8%
$40,000 to $49,999	9.3%	63.2%		11.3%	44.5%
$50,000 to $59,999	6.0%	69.9%		9.4%	55.0%
$60,000 to $69,999	4.2%	74.6%		7.6%	61.8%
$70,000 to $79,999	2.9%	76.8%		5.7%	65.6%
$80,000 to $99,999	2.5%	71.0%		6.8%	65.8%
$100,000 to $119,999	0.9%	59.0%		3.1%	60.1%
$120,000 or more	1.2%	44.1%		4.7%	44.9%
Total**	100.0%			100.0%

Source: Statistics Canada, Longitudinal Administrative Data File.

The Public Service Alliance of Canada reported that women who are retiring from the federal public service with a full pension draw almost as much as men — 97.7%. This might be attributed to “the significant provisions for women as contributors to the plan, including the possibility of accumulating, subject to certain conditions, pensionable service during leave without pay for family obligations, maternity or parental leave or for the relocation of a spouse” [43] and provisions allowing part-time employees to contribute to a pension plan.

The levels of pension coverage for women are largely driven by the public sector. Mr. Terence Yuen told the Committee that if we exclude the public sector and focus only on the private sector, the coverage among women, at 23%, remains significantly lower than among men, at 32%.[44] One of the reasons for this is that” employment in the private sector tends to be more concentrated in the service sector, which consists of a lot of small firms without pension plans. In contrast, a larger proportion of male workers are employed in the goods-producing sector, which tends to have larger and more heavily unionized employers, who are, therefore, more likely to offer pensions to their employees.”[45]

These differences make it important to consider how we can increase pension coverage in small- and medium-size companies in the service sector, and to explore what type of pension system would be most helpful to non-standard and part-time workers. Witnesses have proposed a number of options to meet these goals, as outlined
in Chapter 5.