Retirement security can be more affordable
People often ask whether Canadians are saving enough for retirement. But having enough money to live on through your senior years is about more than just saving. It involves:
- making the right investment decisions,
- having investment discipline during the market’s ups and downs, and
- managing risk over the long term to ensure that you don’t outlive your money.
With all these considerations, the questions we should be asking are:
HOOPP commissioned Common Wealth to lead research to answer these questions, with support from Ryerson University’s National Institute on Aging.
The Value of a Good Pension identifies five value drivers that combine to drastically reduce the cost of retirement.
When all five value drivers are used efficiently, the cost of retirement can be reduced by as much as $890,000.
Let’s take a closer look:
Saving
In a purely voluntary system (do-it-yourself approach), people tend to save less, save later, and save less consistently than under a collective plan with mandatory contributions or automatic enrolment.
Fees and costs
The costs of investment management and administration can have a significant impact on the growth of retirement investments. The costs for good pension plans tend to be significantly lower than the costs of retail investing and advice.
Investment discipline
When investment decisions (e.g., asset allocation, security selection, market timing) are made by professionals, they tend to produce better results than when these decisions are made by individuals who “have a striking ability to do the wrong thing."*
* Andrea Frazzini and Owen Lamont, “Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns” (2008)
Fiduciary governance
When investments are managed on a non-profit basis by in-house professionals with a fiduciary responsibility to members, they tend to perform better than retail funds offered by for-profit organizations.
Risk pooling
Most individual investors must manage their longevity and investment risk on their own, adopting costly strategies (e.g., larger nest egg, smaller draw down, highly conservative post-retirement asset allocation) to avoid outliving their money. By contrast, a good collective retirement plan can create efficiencies by pooling longevity and investment risk.
It costs the average worker saving for retirement on their own $1.2 million in lifetime savings to achieve a 70% replacement rate in their retirement income, while those that leverage the 5 value drivers need to save only $310,000 to achieve the retirement income. See how the value drivers combine to reduce the cost of retirement by $890,000.
Total Cost Without 5 Value Drivers
$1.20M
70%
Income
Total Cost With 5 Value Drivers
$310K
Investment Discipline
$116K
70%
Income
Canada-model pensions leverage all five key value drivers and thereby deliver significant benefits to individual savers and the broader economy:
- Canada-model pension members have more money in their pockets to spend during their working years.
- They also spend more in retirement without fear of outliving their savings in retirement.
But more needs to be done for those without such arrangements. In this era of tight household budgets, low growth and government austerity, we need to improve the efficiency of retirement savings for all Canadians. Failure to do this will be costly for individual savers, taxpayers, the government and the economy in the long run.
So what can we do about it?
We hope that this research supports policy makers and other stakeholders to explore how these five value drivers can be used to everyone’s benefit. In the immediate future, public policy and regulations can help improve conditions by:
- Enhancing scale and portability
- Making savings automatic
- Encouraging good governance and fiduciary standards
- Introducing more risk pooling in the decumulations phase of capital accumulation plans.
This document provides a simplified overview of HOOPP's benefits based on the terms of the HOOPP Plan Text at the time of publication. From time to time, HOOPP may amend the HOOPP Plan Text. In cases where the information provided in this document differs from that contained in the HOOPP Plan Text, the HOOPP Plan Text will govern. More details, including the full HOOPP Plan Text and a complete description of the Plan and its benefits, can be found on hoopp.com.
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