In a 44-page report released August 27, the Securities and Investment Management Association (SIMA) proposed a plan to modernize what it calls Canada's outdated retirement-savings system.
SIMA contends that “Canada's affordability crisis is making it increasingly difficult for many Canadians to save for retirement,” adding that “public policy does not reflect today's pension realities.”
In the report, entitled Canada's Retirement Puzzle: Why Private Savings Must be at the Centre of Reform, SIMA says that private savings presently account for $4.5 trillion of Canadian’s financial wealth and contribute approximately 46% of total Canadian seniors’ retirement income. “Furthermore, the total assets held in private savings far surpass the combined assets of the Canada Pension Plan (CPP), the Quebec Pension Plan (QPP), and all other Canadian Registered Pension Plans (RPPs), underscoring the critical role private savings play in securing retirement for Canadians.”
Harder to save money
The problem is that it is increasingly difficult for Canadians to save due to factors such as inflation, higher housing costs, stagnant wages and household debt levels, says SIMA. “Without action, the gap between what Canadians need for retirement and what they can realistically save will only widen,” the association warns.
Current public policy has not kept pace with changing realities, adds SIMA. “It's based on assumptions from decades ago about when people retire, how long they live, and what kind of support they have through their working years. That disconnect is creating real risks.”
Policy recommendations
The association’s policy recommendations include the modernization of retirement rules to reflect longer lifespans. Presently Canadians must convert their Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund (RRIF) in the year they turn 71 and begin withdrawing funds at 72. “This rule was introduced when lifespans and working patterns were shorter and does not reflect the realities of today,” says the report. SIMA proposes raising this to age 73 to allow more years of tax-deferred growth. This change would also “reflect the reality that many Canadians are working later in life or deferring retirement,” notes the report.
The association also suggests that Canadians with RRIF holdings under $200,000 should have the option to opt out of mandatory withdrawals. This would prevent unnecessary taxation and OAS/GIS clawbacks for middle-income retirees and help retirees avoid selling investments during market downturns just to meet minimum withdrawal rules, says the report.
Level the playing field
SIMA’s second focus area proposes levelling the playing field for all savers. This would require eliminating the GST/HST on investment fund management fees. SIMA points out that Canadians who invest in mutual funds or exchange traded funds currently pay sales tax on the management fees (a blended rate of about 11%). “This doesn’t apply to individual stock or bond holdings, which are more common among high-net-worth investors. Removing the tax would end an unfair penalty on the most accessible and diversified investment products – products that middle-income Canadians rely on most,” says the report.
Levelling the playing field also requires reducing regulatory friction, says SIMA. “Many regulations are well intended, but their cumulative burden can stifle innovation and reduce access.” Reforms should “require market-failure analysis before introducing new rules, shift toward principles-based regulation that preserves investor protection while supporting flexibility and innovation and ensure, through impact assessments, that new rules do not conflict with broader goals like capital formation, financial inclusion, and savings adequacy.”
Expanded access to financial advice
The report also calls for expanded access to financial advice. “Financial advice is associated with 2x to 4x higher wealth accumulation. As more investors turn to digital and self-directed channels, public policy must evolve to ensure these investors are not left behind.”
To address this issue, SIMA calls on policymakers to “support personalized hybrid advice models (human + digital) that meet investors where they are; modernize guidance to clarify what forms of guidance and advice are permissible, including for self-directed investors and encourage the development of scalable advice platforms for middle-income savers.”
SIMA’s third proposal to reform retirement savings would be to make saving the default option in workplace plans. This would require permitting automatic enrollment, deductions, and contribution escalation in workplace group RRSPs to increase participation. “Canada’s voluntary retirement savings system leaves too many people behind,” says the report. “International evidence shows that auto-enrollment significantly increases participation and savings rates.”
Educational initiatives
SIMA also proposes implementing educational initiatives, in participation with the industry, “to help employees understand the benefits and mechanics of automatic savings features to dispel misconceptions and build confidence in participation.”
The report also calls for integrating private savings into the national financial literacy agenda and school curricula. RRSPs, TFSAs, and other private savings tools are often underrepresented in financial education programs, SIMA says.
"Our plan lays out achievable, evidence-based strategies that will boost retirement security, enhance flexibility, reduce pressure on public programs, and support long-term economic growth," stated Andy Mitchell, SIMA's President and CEO in a press release announcing the report’s publication. "With a sense of urgency, Canada needs to evolve and modernize its policies to close the gaps in the system so that more Canadians can take advantage of voluntary private savings options to adequately finance their retirement."
