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Closing the savings gap (May 1, 2015)

Guest column for Investment Executive

by Joanne De Laurentiis, President and CEO, The Investment Funds Institute of Canada

The editorial, “Too late to deny there’s a savings issue,” in the February issue of Investment Executive took issue with the viewpoint held by many within and outside the financial advisory industry that shortfalls in retirement savings are targeted rather than universal. The editorial suggests that this view is incongruous with the industry’s emphasis on the importance of saving. In fact, the two positions are completely aligned.

A recent research report released by the consulting firm McKinsey & Co., entitled Building on Canada’s Strong Retirement Readiness, offers an unbiased picture of the country’s retirement security infrastructure. The McKinsey report finds that a strong majority (83%) of Canadian households are on track to maintain their standard of living in retirement. The 17% not on track – largely middle-income Canadians – will face challenges due to a lack of long-term savings preparedness, not lack of income or resources.

The McKinsey report concludes that the most effective means to support those at risk is through a targeted approach that leaves the rest of an otherwise effective system untouched. That rationale is well supported, with evidence showing that doing otherwise would simply waste resources. The McKinsey study found that implementing the Ontario Retirement Pension Plan (ORPP) could lead some modest-income households to oversave, or result in low or even negative returns for some Ontarians due to clawbacks on federal programs, such as old-age security (OAS).

The investment funds industry’s long-standing emphases on private savings and the value of advice are significant contributing factors to why retirement readiness is relatively high. Savings in mutual funds are more than $1.2 trillion; that is 2.5 times the assets being managed within the Canada and Quebec pension plans.

Studies show that individuals who access a financial advisor regularly make higher use of RRSPs, with mutual funds accounting for 47% of all wealth held in RRSPs. More than all of that is the fact that advisors help create the discipline required to create and stick to a savings plan.

The role of government is to put in place intelligent public policies that carefully balance mandatory components with appropriate inducements that lead individuals to increase their personal savings. If those policies simply create a substitution effect, then the effort has failed. There are ample indications – compiled by grass-roots organizations such as the Ontario Chamber of Commerce and the Canadian Federation for Small Business – that the ORPP would displace existing plans to a certain extent. That outcome can hardly be considered successful.

In Canada, we have built a solid retirement savings structure, with clear pillars that combine a universal workplace pension through the Canada Pension Plan (CPP), government-funded universal old-age security allowances such as OAS, workplace pensions, and individual tax-advantaged programs such as RRSPs, which many employers sponsor through group RRSPs.

These options can be improved by making specific changes, such as enhancing the design of the federal pooled registered pension plan, making improvements to group RRSPs and expanding the CPP.

An analysis by economist Jack Mintz identified several additional opportunities to help to ease the challenges of vulnerable groups. These include addressing inefficiencies arising from the clawback of federal benefits such as the OAS, eliminating inequities between private- and public-sector employees (including the self-employed) and eliminating or reducing barriers to the creation of group RRSPs. Ottawa and the provinces would do well to pursue the approaches outlined in the McKinsey and Mintz papers.

The Investment Funds Institute of Canada’s position mirrors the McKinsey and Mintz conclusions: that is, since the existing system works adequately for the majority of Canadian households, let’s put our efforts into making changes that specifically help those in need.

By closing the gaps, our reasonably balanced system can be taken from good to great.