In recent times, there has been a particular focus in the US on retirement security. While assessing potential solutions to the multi-employer pension plan financial crisis, policymakers are also considering a plan that would allow small businesses to offer group retirement plans with other small entities. In Canada too, the Canada Pension Plan is getting stronger thanks to a consultation from the federal government.
Though the various talks and discussions have had very different topics and policies in mind, they all seem to have one theme; maximizing the efficiency of retirement savings. For each dollar of contribution, can we maximize retirement income for all workers?
Thanks to a recent report from the Healthcare of Ontario Pension Plan and Common Wealth, we can compare many different approaches to financing retirement. In order to reduce the cost of retirement for the average American citizen, five value drivers were tested;
-Fiduciary government improvements
-Longevity/investment risk pooling
-Better investment discipline
How will these five changes in the industry impact the cost of retirement? In truth, the results were surprising when compared over a lifetime of work. For example, if we consider all five of these value drivers a ‘good’ pension plan, the typical individual approach would require C$1 million more for the EXACT same retirement income.
For a dollar of contribution, the research showed the following yields;
-Typical Individual Approach – C$1.70
-‘Good’ Pension – C$5.32
Of course, not everything in the report is applicable to the United States, but the five value drivers are relevant for all countries. As proof of this, similar results actually came out of a study in Australia when comparing retail funds with its industry superannuation funds.
Real Opportunities for Progress
Perhaps the most important detail to note from this study is that a ‘good’ pension isn’t unachievable. Rather than being theoretical, all of the five value drivers can be found in the world’s best developed pension plans. In fact, Canada’s own HOOPP is a prime example and could be used as guidance for those looking to improve the efficiency of retirement savings.
Among other things, the need for expanded workplace retirement plans is obvious. In recent years, decreasing participation has quickly become a theme, but both the US and Canada are now attempting to fix the coverage gap. In the same report, some suggestions included using regulation and public policy as the driving force for increased coverage and even allowing access for contingent workers (consultants and freelancers).
As well as improving coverage, the efficiency of plans has also been a topic of conversation. How could we improve the efficiency of workplace retirement plans? With the five value drivers used in the report;
-Low Costs and Transparency – In-house investment managing (for the larger plans), economies of scale, and transparency across the board.
-Mandatory Contributions – Although the US is certainly ahead of Canada when it comes to automatic enrollment, there’s still potential for improvement.
-Investment Discipline – All workplace retirement plans could have streamlined investment choices; all default choices should also be individually chosen (and diversified) according to age.
-Improved Fiduciary Governance – Put members at the top of all concerns with non-profit, independent agencies governing the plans.
-Investment/Longevity Risk Pooling – For stakeholders, a common preoccupation is to provide support in the decumulation stage for DC plan members.
In the coming months, improving the efficiency of retirement building for all workers in the US is likely to be a continuing debate. Fortunately, research is now suggesting actionable advice, and the coverage gap seems to be a problem with solutions ahead!