Right now, Canadians have more than $1 trillion in individual retirement savings.
But Keith Ambachtsheer, director of the Rotman International Centre for Pension Management, is unhappy that most of it is in retail mutual funds.
“There’s a 30-basis-point solution for these people,” he said at Rotman School of Management (in partnership with AIMA and PMAC) luncheon in Toronto. He asserts asymmetric information prevents clients from switching to passive, low-cost investments.
In response to a question about the value of advice, he concedes people need guidance on what to do while working in order to prepare for post-work years. But he says it’s “fundamentally wrong” that advisors earn trailers on investment products, and he wants Canada to ban embedded commissions like the U.K. and Australia.
Proposed retirement solution for Canadians
Ambachtsheer says 15% of Canadians will experience a significant drop in their standards of living when they retire due to inadequate savings. And it gets worse for those aged 25 to 35 right now: 40% will likely see a major drop.
And neither Big CPP nor PRPPs will encourage sufficient savings, he says. In particular, he calls Big CPP a “one-size-fits-all solution for a targeted problem,” adding the next generation would be forced to fund any shortfall due to faulty assumptions.
Instead, Ambachtsheer, who’s advising Ontario premier Kathleen Wynne on retirement solutions, proposes a Canada Supplementary Pension Plan. (The CD Howe Institute first published this plan in 2008.)
It has four components:
1. All employers who don’t have an employee retirement plan will have to enroll in CSPP. Employees could opt out individually.
2. The CSPP contribution will be 6% of pay, split between employee and employer. He says this should lead to 60% income replacement for the middle class in retirement.
3. There would be a default age-based investment policy, and the possibility for annuitization.
4. It would be run by a “great pension organization.”
One audience member asked if education would help sway young people to save more now.
“Education only gets you so far,” he responds, since young people are overly optimistic about their future ability to earn and save. He adds we need to tackle this fallacy instead.
While he doesn’t advocate mandating retirement savings, he wants it to become difficult not to save. For instance, the opt-out rate for Britain’s retirement savings program, NEST, is a mere 8%.