It’s the season to focus on
retirement savings — the time of year when investment professionals can show the added value they bring to clients with meaningful retirement planning advice.

Key to delivering this advice is understanding the Canadian retirement income system and the role its three pillars play in achieving its two basic goals: guaranteeing a basic minimum income for all seniors, and encouraging and assisting Canadians to accumulate sufficient retirement assets in order to avoid a significant drop in living standards after they leave the workforce.

The three pillars of the Canadian retirement income system are:

> the public old-age security and guaranteed income supplement programs, which provide flat-rate, income-tested benefits directed at the “income guarantee” goal;

> the contributory Canada and Quebec pension plans, which form the second pillar and provide earnings-related benefits that advance both the “income guarantee” goal and the “earnings replacement” goal; and

> private savings in employer-sponsored registered pension plans and in individual registered retirement savings plans, with the assets in these plans being directed mainly at the “earnings replacement” goal.

The Canadian retirement income system is complex. But it is essential to cut through the complexity to help clients secure their lifetime financial well-being. Help is available in Bruce Cohen’s and Brian Fitzgerald’s The Pension Puzzle (John Wiley & Sons Ltd.). The new third edition of this classic explains in plain English what members of RPPs and RRSPs should know to determine whether their retirement savings are secure and sizable enough for their needs. It answers many frequently asked questions, as well as many questions that should be asked but often aren’t until it’s too late. It also deals with issues that may trip up people leaving RPPs.

In helping clients make informed decisions, financial services providers and advisors also face the flaws in how corporate pension plans are structured, operated and administered. Among the issues that plague both defined-benefit and defined-contribution pension plans are: solvency, including sustainability of benefits; governance and risk management; intergenerational and other inherent conflicts of interest; shortcomings in the knowledge and awareness of pension plan trustees and administrators (including plan sponsors); lack of knowledge and awareness of plan members; and complexity of the regulatory structure and of the legal, tax, pension, labour, accounting and actuarial requirements.

The more financial services providers, financial advisors and their clients understand these problems, the more likely they are to demand change. Again, help is available in a new book by Keith Ambachtsheer explaining why we need a pension revolution. Pension Revolution: A solution to the pension crisis (Wiley) outlines why a new pension design called TOPS — The Optimal Pension System — is a solution.

Ambachtsheer is director of the Rot-man International Centre for Pension Management, a research centre at the Rotman School of Management at the University of Toronto. The pension design he advocates avoids the pitfalls of existing DB pension plans and the problems of DC plans, including the risk of outliving your money.

Gaining an understanding of what it takes to build sufficient retirement income and marshalling the will to do so is the fundamental societal issue facing Canadians in the 21st century. Get involved. IE