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Saying goodbye to traditional pension plans

Michel St-Germain has spent 45 years thinking about pensions. St-Germain, the immediate past president of the Canadian Institute of Actuaries, says the Canadian pension landscape has shifted a great deal — albeit slowly.

A defined benefit pension plan is likely what you think of when imagining a pension: over your career, both you and your employer contribute to the plan. Once you retire, you’ll receive a specific and set amount of income for life.

Defined contribution plans, on the other hand, don’t guarantee any income. Both employer and employee make contributions, but there are typically limits on annual contribution amounts and market volatility means you won’t know exactly how much income you can rely on in retirement.

While defined benefit pensions are still the norm in the public sector — which St-Germain concedes is a huge percentage of the Canadian labour force — they’re few and far between outside of government jobs.

“What has been going on is what I call a transfer of risks from employers,” says St-Germain, who is based in Montreal. “Basically, a great number of Canadians working in the private sector are left to themselves rather than relying on the employer.”

Having enough money to retire one day is a common concern Wendy Brookhouse, a certified financial planner and founder of Black Star Wealth in Halifax, sees with her clients.

“There are a lot of preconceived notions, there’s lots of rules of thumb out there that may or may not serve people, you know … ‘you need a million dollars to retire,’ or ‘you need X% of your pre-retirement income,” says Brookhouse. “In retirement, that’s not always true.”

The challenge most people find with saving for retirement is having to think about it. Brookhouse says with defined benefit pensions, if you have it set up to take the money directly from your paycheque, it’s much easier not to miss it.

But for everyone else, that few hundred dollars a month might feel like a big sacrifice.

“All those pressures of today will almost always supersede the pressures of thinking about tomorrow … until tomorrow,” says Brookhouse.

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Take advantage of life insurance

Brookhouse generally urges her clients to get in the habit of saving every month — even if it’s just a small amount — to get compound interest working in their favour.

While Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are both great retirement savings tools, she also recommends insurance — especially when you have no pension to fall back on.

Many life insurance plans will allow you to access their cash value at some point — through a line of credit — against the death benefit. Brookhouse likes this option because it doesn’t affect your taxable income level and when you die, that line of credit will be paid off and the rest of the benefit will go to your beneficiary.

Join the Saskatchewan Pension Plan(!)

Another option for those without workplace pension plans is the Saskatchewan Pension Plan (SPP). This plan was created by the Saskatchewan government in 1986 to help fill the gap for residents of the province who didn’t have access to a professionally managed pension plan. The program has since been expanded to all Canadians.

“The goal was to provide a collective non-profit — a trusted collaboration where people could finally get the really low fees they typically would get through a professionally managed plan,” says Shannan Corey, executive director of SPP in Kindersley, Sask.

In 2022, you can put up to $7,000 into the fund, depending on your personal RRSP contribution room. The fund currently has 33,000 members, with about $600 million invested. The historical returns are about 8% and annual fees are less than 1%.

Once deposited, your funds are locked in until you turn 55.

Then, when it’s time to start pulling your pension, how much you’ll get depends on how much you’ve contributed. You can then choose to have the pension paid out either through an annuity, a variable benefit (for just Saskatchewan residents), or have it transferred to another retirement account.

“Our plan was designed for people who had gaps,” says Corey. “The flexibility that we offer can really help people navigate those ups and downs a little better.”

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Retire later?

St-Germain says the biggest shortfall in the Canadian pension system is that people without defined benefit pension plans don’t have proper guidance on how to use the funds efficiently.

“We haven't really found a way of helping people make decisions on when and how to withdraw their money… We're working on it. But that remains to be done.”

One major solution is simply working longer. In fact, the Canadian Institute of Actuaries has been advocating for the government to push back the retirement age for this very reason.

Currently, government pension benefits must be started by age 70. By pushing that to 75 and retiring a few years later than 65, St-Germain says the financial needs of about 90% of recipients would be fully covered.

As for young people who are fretting over whether they’ll ever be able to retire, Brookhouse says they shouldn’t panic until they’ve really analyzed the numbers. People are often surprised by how close they actually are to being able to retire one day.

St-Germain adds his advice for younger generations is not to worry too much. It’s OK to focus on your family’s immediate needs for now and catch up later — there’s enough flexibility built into the system to allow for that. He also anticipates that the next few decades will bring improvements and additional supports for the Canadian pension system.

“Don't worry about retirement — we have a good system and hopefully, by the time you reach age 65, we will be able to find financial planners to help you make decisions and financial institutions that will offer new products.”

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