It’s no secret that Canadians are having trouble saving for retirement. Look no further than your usual news sources, and you’ll encounter the latest headline on the status of Canadians’ financial well-being. Recently, the combination of higher-than-historic inflation and the challenge of making ends meet (e.g., shelter, groceries) is impacting future retirement savings. As a plan sponsor for 11 years and a practicing pension actuary before that, this made me pause.
There is a fine balance between spending today to meet a certain standard of living versus investing in your future standard of living. But why is it so important to face this question, as difficult as it is?
According to the Financial Consumer Agency of Canada’s (FCA) website, starting retirement savings is never too early. Dig a little deeper; the impact of saving as much as you can, as early as you can, is staggering.
For example, as per the FCA’s website, if the target retirement savings goal is $100,000, you’re earning an annual interest rate of 5% compounded on your savings, and you have 20 years to save; you need to put away about $250 per month. But if you defer saving and have only 10 years to grow your money, you need to save about $650 per month. The ‘lost’ interest in this example is about $19,000, or around 20 percent of the savings goal. Now, retirement will require much more than $100,000. Assuming the savings target is $1 million, this would translate to $190,000 of lost interest, following the FCA’s assumptions!
So, we’ve established that getting started saving early is ideal. We also know employees are in the driver's seat with their savings, budgeting and expenditures. What role can plan sponsors play?
Have you considered how 'easy' it is for employees to save directly from their pay? Do you offer payroll deductions, or is the only mechanism for optional contributions by lump sum transfer?
Since pension and savings plans tend to be set up with a goal of enduring over a longer time horizon, this article shines a spotlight on a few plan design elements that may encourage consistent, long-term saving.
Offering a variety of account types is a huge plus for your employees. If it’s been a few years since you reviewed your offering, now is a great time to expand beyond a group-RRSP-only design, i.e., group Registered Retirement Savings Plan. Expanding the accounts available is a nominal added set-up for the employer and a huge benefit to employees. For example, add a Tax-Free Savings Account (TFSA) and a Non-Registered account option. In Sun Life’s 2023 Designed for Savings report, only one-third of the large plan sponsors (1,000 plan members and over) offer a pension, group RRSP and TFSA. Smaller employers tend to offer these even less often. Given this, there should be a number of plan sponsors with an opportunity to include TFSAs and non-registered accounts.
Offering a pension program as part of the suite is an excellent way to foster true retirement income. In a registered pension plan, the account can only be accessed prior to retirement age in very limited circumstances and, as such, is more likely to be used for retirement income. While employees may prefer the concept of a higher base salary now, employers can help move the retirement savings needle by structuring a total rewards package inclusive of a pension.
Have you considered how ‘easy’ it is for employees to save directly from their pay? Do you offer payroll deductions, or is the only mechanism for optional contributions by lump sum transfer?
Is there anything getting in the way, or is it easy for employees to set up their payroll deductions? In Sun Life’s 2023 Designed for Savings report, the plan members served by the largest plans (75 percent of plan members and 29 percent of Sun Life’s plan sponsors) have access to digital enrollment. This means there is room to move the needle towards a digital experience, particularly for smaller employers.
How can you further drive participation in support of setting up your employees for success? If your program includes a matching opportunity, where employees need to contribute to earn the employer match – when was the last time you ran the metrics on whether employees are taking full advantage of the match?
Assuming uptake leaves something to be desired, one way to move the needle is to set up a default savings rate that maximizes the employer match. You can set this up either at hire or as a one-time re-enrollment milestone. The principle of inertia tends to kick in, where once something is set up, employees are unlikely to go in and make a change.
Cenovus Energy completed a historic merger with Husky Energy in 2021. Both companies had well-governed robust pension and savings programs; still, the merger offered the perfect opportunity to review the finer details and make some tweaks. The plan member experience was central to our review, and we considered all the ideas above.
In our case, the area of greatest opportunity was opting employees into the maximum pension and investment plan match, with the ability to opt-out. We knew that amidst the change employees faced in the merger, it would be challenging to have all employees proactively opt into the matching program, and we didn’t want our employees to miss out. We developed a robust communication strategy, where we took steps to inform all employees who opted into the match, as well as details on how they could opt out. The resulting participation rate was very strong. We also added the option for employees to elect payroll deductions for their TFSA contributions, as part of our merged employee population only previously had a non-registered or RRSP option by payroll deduction.
Looking ahead, a trend that has been written about in the U.S. that I’m interested in exploring is auto-escalation. Auto-escalation is designed to increase the savings percentage gradually over time up to a maximum. For example, salary increase time would be the perfect opportunity to automatically nudge the retirement savings rate up, even slightly, before a higher disposable income has come to bear. The time value of money demonstrates this could be very powerful to assist employees with retirement savings. As with most things in life, it's the little things that can make the biggest difference.
