Canada slid from 9th to 12th place in the latest Mercer CFA Institute Global Pension Index. The Index compares 43 pension plans representing 65 per cent of the world’s population.
In the thirteenth edition of the ranking, released in mid-October, Iceland makes a debut atop the list, outperforming the Netherlands and Denmark, two other countries with which it shares an A rating. Index author David Knox explains that the systems in all three countries are sustainable, well-governed, and provide strong pension benefits to individuals. These benefits exceed those received by Canadian retirees.
Canada retains its B rating, but its overall index of 69.8 relegated it to 12th place this year. All the same, our country bested Germany (67.9) ranked 14th, the United States (61.4), in 19th slot, France (60.5) at 21st and Japan (49.8), 36th on the list. Thailand received the lowest score of all countries compared, at 40.6.
F. Hubert Tremblay,actuaryand senior wealth advisor at Mercer in Montreal, describes Canada’s pension system, with its public plans, as good, but it has its flaws. This accounts for its descent to 12th position.
“One of the main reasons for this result,” he told Insurance Portal, “is the lack of pension plans in the private sector. In Canada, an estimated less than 10 per cent of private sector employees are covered by a defined benefit plan. That's a pretty significant weakness. We don't have job-related pension plans across the country like the VRSP in Quebec, which is almost mandatory. Many of the top performing countries have these plans. This is what is keeping Canada from achieving an A rating. Countries that require workers to contribute to an employer-sponsored plan perform much better because the pension benefit levels are higher.”
Stable situation in Canada
The pension situation in Canada has remained fairly stable over the past three years, Tremblay points out, although there have been improvements and additions to public pension plans such as the Quebec Pension Plan (QPP) and the federal pension. All the same, progress has been so slow that it has not affected Canada’s status in the Mercer Global Index.
Among the other factors that contribute to Canada’s position, people are retiring early, around age 60. In addition, the high investment fees for individual savings eat into their returns. As a result, individuals cannot save as much for retirement.
The Mercer consultant is dismayed that most of Canada’s workforce does not have an employer-sponsored plan. Workers are left to fend for themselves when it comes to saving for retirement. He believes that private employers should provide their employees with a pension by joining a group defined benefit pension plan or by offering a defined contribution pension plan through an external provider.
The replacement rate is the percentage of a worker’s total income paid out by a pension program. This rate should be between 50 and 70 per cent. Plans must not only be adequate, they must also be sustainable. “Promising super high benefits is fine,” says Tremblay, “but if plans can't deliver for various reasons, companies won’t be able to fulfill their promises. In countries that have an A rating, sustainability is very good and ample assets are set aside to secure benefits to be delivered later. Some are reaching a level of funding equal to three times the country’s gross domestic product. In Canada, we are not yet at that level.”
Integrity, governance, solvency, and people’s level of confidence in their system also factor into the evaluation of each country’s plans.
Gender gap
Mercer’s 2021 ranking notes persistent retirement income gaps between men and women. Women are disadvantaged by a host of factors: They are more likely to hold part-time jobs, their wages still tend to be lower than those of their male colleagues, they do not accumulate pension benefits if they stay at home to care for children or elderly parents, and they have longer life expectancies. Poverty is widespread among the elderly; women are particularly affected.
Mercer encourages employers to review the design of their retirement plans, as well as other compensation programs, to ensure that they are not unconsciously disadvantaging women. To reduce disparities and close this gender gap, the consulting firm advocates that regardless of income earned, number of hours worked or years of service, everyone should be able to participate in a retirement plan that provides adequate benefits.
“Pension funds can also introduce credits for those caring for the young and old. Caregivers provide a valuable service to the community and shouldn’t be penalized in their retirement years for taking time out of the formal workforce,” the study says.
Here are the top 12 countries in Mercer's 2021 rankings and their overall scores:
