How do Canada-model pension plans compare?

Many Canadians do not have access to a workplace retirement plan, meaning those individuals are left to save for retirement on their own, without support from their employer. Although all individuals should have personal retirement savings (noted as the third pillar of retirement income), in this context, the individual approach specifically applies to those Canadians without access to a workplace retirement offering.

For most, this means saving for retirement with a large financial institution such as a bank, with typical fees of about 2%. Individuals are more likely to make common mistakes in saving (e.g., waiting too long to start saving) and investing (e.g., poor asset allocation, poor market timing, etc.). Individuals must also determine how their assets will be managed and turned into income in retirement.

In a small-employer capital accumulation plan, such as a group registered retirement savings plan (RRSP), the employer will typically match employee contributions up to a certain level. These plans are commonly offered by small or mid-sized employers in the private or non-profit sectors.

Employees in small-employer capital accumulation plans typically pay higher fees than those in larger plans and each plan member maintains control over their investment decisions. The investment choices available to members may be less robust than those offered by a larger plan. At retirement, how a plan member’s assets are turned into retirement income varies depending on their plan.

Large employers may offer a capital accumulation plan, such as a group registered retirement savings plan (group RRSP) or a defined contribution (DC) pension plan. Large-employer plans are more likely than small-employer plans to have mandatory or automatic contributions, which may be matched by the employer up to a certain level.

Employees are often responsible for choosing their own investments, but the investments available to them may have more input from the employer’s human resources department and/or professional consultants than a small-employer plan. At retirement, how a plan member’s assets are turned into retirement income varies depending on their plan.

Large-scale pooled plans are larger plans which incorporate some degree of risk pooling and portability. These plans can include defined benefit (DB) plans or target benefit plans.

These plans tend to be multi-employer and have access to low-cost asset management, which means lower fees for members. Employees make mandatory contributions which are matched by employers up to a certain level and investment choices are highly curated for plan members. At retirement, how a plan member’s assets are turned into retirement income varies depending on their plan.

A Canada-model pension plan, like HOOPP, includes mandatory or automatic contributions by plan members and employers and all investment decisions are managed by experts. These are typically defined benefit (DB) pension plans with independent governance, scale, in-house management, diversification and a long-time horizon, which means it uses long-term investment strategies to withstand short-term market volatility.

Canada-model pension plans also utilize all five value drivers of retirement efficiency: saving, fees and costs, investment discipline, fiduciary governance and risk pooling. At retirement, members receive a lifelong income paid out by the plan. This income is based on a formula that considers earnings and/or service in the plan, so the longer a member and their employer contributes the bigger their pension will be.