Not only does belonging to an employer-sponsored pension plan provide a solid basis for retirement savings, new research finds that it also helps boost returns on workers’ outside investments, according to new research from Statistics Canada (StatsCan).
Although previous research has examined how membership in a pension can affect how much workers decide to save, StatsCan sought to understand whether there’s any effect on the returns that they generate on that savings.
To that end, StatsCan analyzed the relationship between pension coverage and the investment performance in TFSAs for a representative sample of approximately 345,000 Canadian taxpayers between 2009 and 2013. Overall, it finds that pension coverage has a “positive but modest effect on TFSA performance.”
StatsCan estimates that belonging to pension at some point leads to a higher average rate of return of approximately 0.50% to 1.25%: “While belonging to [a pension] helps boost individuals’ non-workplace investment performance by a statistically significant amount, the magnitude of this effect is economically modest.”
In terms of explaining the effect, StatsCan points to a couple of possible reasons. For one, having a pension may cause workers to start thinking about saving earlier in life; and having core retirement savings in a pension may enable workers to invest in riskier assets in their private investments, producing higher returns.
“Taken together, the findings suggest that the gradual decline in [pension] coverage in some industries over the past several decades could have led to a corresponding decline in non-workplace risk-taking or investment performance and, as a result, may have even contributed to the aggregate decline in private saving rates,” StatsCan’s report states. “The results of this study are consistent with the notion that programs aimed at directly improving saving outcomes — for example, by simplifying the process of making complex financial decisions — are desirable.”