Global consultancy calls on Canadian plan sponsors to seize the moment and prepare their pension plans for the future
Mercer, a global consulting leader in advancing health, wealth and career, and a wholly-owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), today called on plan sponsors to evaluate the risks facing their pension plans now, whether or not present historic stock market highs continue.
The call came at the launch of Mercer’s 26th Annual Retirement Outlook and Fearless Forecast event series in Toronto. The event series looks ahead to market performance in 2018, and provides sound advice on how to future-proof your pension plan.
“Irrespective of whether the bulls or the bears prove right, employers and plan sponsors have to confront the realities of demographics and of retirement savings,” says Jean-Philippe Provost, Leader of Mercer Canada’s Wealth business. “In order to ensure comfort in retirement for Canadian workers, we must be bold. We call on employers and plan sponsors to take action to Mend the Gap.”
BULLS OR BEARS?
Canadian pensions are beginning 2018 well-funded. This is due in part to strong global equities performance. But there are questions about whether markets’ strong performance can continue forever. As central banks transition from Quantitative Easing to Quantitative Tightening, there are ongoing geopolitical risks – particularly in Asia – and it remains to be seen whether the US tax reform bill will have a beneficial effect.
Despite these risks, there are also signs of strength: central banks have demonstrated an ability to contain inflation at low, positive levels, taxes are being reduced in the United States, and labour markets are strong.
MIND THE GAP
In light of this uncertainty, from an investment perspective, plan sponsors’ de-risking strategy depends on their investment horizon. They must also contend with long-term demographic and fiscal realities: Canada’s population is aging and we are not saving enough to ensure comfort in retirement.
Canada has a US $2.5 trillion gap between existing retirement savings and future retirement needs, with the gap expected to grow to US $13.4 trillion by 2050. This gap is created not only by demographic forces, but by the fundamentals of saving and financial literacy:
- Access to Coverage – As employment continues to become more flexible, access to corporate pension plans will continue to be reduced.
- Long-Term Low-Growth Environment – The last decade has seen long-term investment returns lower than the global historical average. This places a huge strain on plan sponsors.
- Low Levels of Financial Literacy – Financial literacy levels are low across the spectrum in Canada – 60 per cent of employees feel stressed about their financial situations.
- Inadequate Levels of Saving – Canadians simply do not save enough, and rates of return fall short of savers’ expectations.
- Gender Imbalance in Long-Term Savings – Women tend to receive lower pay and spend longer periods out of the workforce. This, combined with a longer life expectancy, means the retirement savings gap is wider for women than it is for men.
While longevity and the retirement savings gap are challenging, this challenge can be met. But governments and employers must be ready to be bold.
BOLD STEPS TO MEND IT
Governments across Canada are taking steps to ensure pension sustainability: in December, Ontario announced new funding rules, which will enhance the governance of pension plans and balance contribution levels with benefit security. These changes follow similar legislation enacted in Quebec and will place pressure on policymakers across Canada to follow suit.
But more must be done.
At the Toronto event, Mercer outlined bold – but actionable – steps to ensure retirement security for Canadians at all income levels:
- Start a Financial Fitness Revolution – Provide employees with the tools to keep themselves financially fit and design those tools to keep saving engaging and rewarding.
- Show Individuals What ‘Good’ Looks Like – As investment responsibilities continue to be transferred to plan participants, employers must equip those participants with the knowledge to understand what a ‘good’ financial plan looks like, how to understand and manage their risks and which tools are appropriate for which situation.
- Create Smart Plans That Lead to Results – For those employees that still have access to plans, those plans will need to be prepared for the future. In a world where a worker may be retired for more than 25 years, the traditional look at the ‘investment horizon’ may need to be upended. If we consider a DB plan, perhaps certain ancillary benefits need to shift from being a guarantee to being contingent on certain financial metrics being achieved. Plan sponsors may need to help employees help themselves by including features such as minimum contribution requirements and auto-escalation in their DC plan design.
Mercer Canada’s 26th Annual Retirement Outlook and Fearless Forecast events are scheduled across the country between January 18th and February 20th. For more information, please visit:
Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 22,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.ca. Follow Mercer on Twitter @MercerCanada.