How to save Canada's future retirees, maybe: Automatic pension
plans: Most employees 'should not be left to their own devices'
National Post
Wed 04 Oct 2006
Page: FP7
Section:
Financial Post
Byline: Duncan Mavin
Source: Financial Post
Series:
The Boomer Effect

Keith Ambachtsheer has a cure for Canada's pension ills.

Canada's leading pension industry expert says the solution lies in providing
people with savings power, along with sound investing knowledge.

The failure of many traditional corporate pension plans and the fact most
Canadians are not putting enough into personal savings is best addressed by
automatically enrolling workers in pension plans while also providing specific
investment guidance tailored to individuals, says Mr. Ambachtsheer, director of
the Rotman International Centre for Pension Management at the University of
Toronto.

Widespread fears about a pension crisis afflicting economies around the
world, including Canada's, are based on a combination of factors.

A weakened investment environment in recent years, caused principally by
sustained low interest rates, has resulted in a host of company pension plans
falling into a deficit position -- in which there are insufficient assets in the
fund to cover the anticipated withdrawals by existing and future pensioners.

The big high-profile funding failures have been in the United States at car
manufacturers such as Ford Motor Co. and General Motors Corp., as well as major
airlines such as United.

In Canada, too, there have been headline-making company pension issues at,
for instance, Air Canada, Stelco Inc., and Nortel Networks Corp. In fact, the
aggregate pension funding deficit of the TSX 60 in 2005 was $20.5-billion -- a
figure that has risen after three years of relative stability near the
$15-billion mark, according to a recent report by UBS Investment Research.

In addition, many companies have switched from defined benefit pension plans
to defined contribution plans to ease the burden. But in fact all that may have
done is shift the burden from employers to employees.

Meanwhile, record numbers of ageing boomers are set to have a longer
retirement period than ever before, straining the limited resources of pension
funds that will be paid for by fewer productive workers -- even waves of younger
immigrants can do little to alleviate Canada's looming old-age dependency
problems over the next 50 years, said a recent paper released by the C.D. Howe Institute.

Some companies are responding by cutting back on all post-retirement benefits
in order to keep their heads above water. A quarter of Canadian companies plan
on reducing benefit programs for retired workers in the next three years, and
another quarter are unsure whether they will be able to maintain current
programs, according to a recent survey by Mercer Health and Benefits.

However, possibly the biggest concern for the pension industry is that
individuals themselves are not saving enough funds to pay for their retirement
goals, or are not saving in "sensible, dependable ways," said Mr. Ambachtsheer
in an interview.

"A very large proportion of the workforce should not be left to their own
devices [when it comes to retirement planning]," he said. "They need help."

In fact, only about 40% of the Canadian workforce is covered by an
employment-based pension plan, he said, which means the rest of the population
are being left to fend for themselves.

The result is that there is not just a pension crisis, "there's a coverage
crisis," said Mr. Ambachtsheer.

Although banks and insurance companies offer a plethora of funds and pension
planning tools, they don't provide the answer for all workers, some of whom
either choose not to buy the products on offer or do not understand what they
are buying, said Mr. Ambachtsheer.

The popularity of registered retirement savings plans has only gone part of
the way to dealing with the shortfall in pension planning, he said, because not
everyone participates.

In place of existing systems in North America and elsewhere, Mr. Ambachtsheer
favours systems such as those already in place in the Netherlands and Australia,
where all workers must participate in a workplace pension scheme.

The Dutch and Australian governments do not have to finance national pension
plans, while individuals are more focused on proper retirement savings
strategies, said Mr. Ambachtsheer.

Meanwhile, the British government's Pension Commission -- established two
years ago to look into ways to bridge a reported $120-billion gap in the
retirement savings of British workers -- has suggested a plan to oblige
employers and employees to make contributions to a national pension savings
scheme.

Closer to home, he said, there are examples too. In particular, he points to
the Ontario Teachers Pension Plan. "It's an excellent model," he said. "It's got
scale. It's got expertise. And it's got good governance."

[email-masked]

Illustration:
• Black & White Photo: AFP, Getty
Images, Handout / United Airlines flight attendants pose in a 2005 calendar
titled "Stewardess Stripped," protesting the fact that United Airlines had
defaulted on its pension plan. At a cost of US$6.6-billion, it was the largest
pension default in U.S. history.

Edition: National
Story Type: Business; Series

Length: 737 words