The article below was originally published from the April 2019 issue of Benefits and Pensions Monitor. This article is reprinted and published below with the permission of Benefits and Pensions Monitor.
It’s no surprise that pension plan sponsors face challenges ‒ from keeping up to date with legislative changes to managing aging demographics and related retirement benefit costs. Yet, our industry has not been as focused on what these trends mean to plan members.
Aon’s ‘2018 Global DC and Financial Wellbeing Survey’ examined CAP (capital accumulation plan) members’ retirement expectations and their current financial health. What we found among over 1,000 Canadian CAP members across various income levels and career stages is that perceptions are not lining up with reality when it comes to retirement.
Plan Member Optimism Runs High
On the whole, the survey suggests that Canadian CAP members are positive about their current financial wellbeing and making financial decisions for the future. General optimism runs high: few view their current financial situation negatively or feel they have no options to change their financial situation. As might be expected, there are some variations across income levels, yet even among low income employees, only 27 per cent rate their current financial situation as poor. Adding to this, members indicate that they understand financial matters and try to stay informed about money matters and finance ‒ foundations for financial wellbeing.
Despite all this optimism, employees are finding it difficult to save for retirement. While survey respondents indicate that saving for retirement is a top priority, their biggest challenge is being able to afford to save more. Understandably, saving enough for retirement is more demanding in today’s low interest environment and high-priced housing market. And this is true for employees across all age groups who juggle their own unique financial priorities. Those closer to retirement may need to withdraw money from retirement savings to support their children (education or home purchase) or parents (long-term care) or sometimes both. Employees early in their careers find it difficult to save for retirement while paying off student debt, covering childcare expenses, and trying to get into the housing market.
More than half of employees say they are concerned about not having enough money to retire when they want to and worry about outliving their savings (See Figure 1).
As most members expect their main retirement income to come from their employer’s plan and are confident that it will prepare them for a financially secure retirement, plan design, communication, and member engagement become critically important.
There is high participation in employer sponsored CAPs among the survey respondents; however, retirement savings are not optimized due to several factors (See Figure 2):
- 41 per cent in employer matching plans are not taking full advantage of employer-matching contributions
- one in five do not know how much they or their employers contribute
- The majority are contributing less than 10 per cent of their salary
Depending on other available sources of income in retirement, including government plans and personal savings, current contribution levels may be inadequate to meet employees’ total income needs in retirement. When we take a more holistic approach to see if employees are on track to reach their retirement goal, we find gaps exist between employees’ ideas on how much they need to maintain their standard of living in retirement and how they will achieve this:
Set A Goal
Only two in five members have set a goal for how much they need to save before full retirement and close to 50 per cent say their outstanding debts are preventing them from saving for retirement. The results indicate widespread anxiety among employees that they will not reach their retirement goals. Members understand that they need to rethink their expectations and the trends point to delayed or redefined retirement for many. Among those who expect to fully retire, two-thirds expect to do so by age 66, but 30 per cent expect to continue working forever, at least in some capacity.
Employees may be delaying retirement because they cannot afford to retire earlier. If so, these findings should concern employees and employers as they have implications on the future shape of the workforce. Employers need to weigh the reality of these varying expectations with their own needs to have a productive and engaged workforce.
Additionally, employers need to consider the effects, such as risk in retaining talent with reduced career advancement opportunities for mid-level employees, higher benefit costs (and change in coverage) for older employees, and challenges with phased retirement programs (paying both pension and salaries to encourage older employees to retire). It’s clear that employees need help achieving financial wellbeing and the resources to retire at a time of their choosing. The implications should leave employers asking if they need to do more to help their employees attain better retirement outcomes.
The survey shows that there are opportunities for employers to help their employees plan for retirement and broader support for financial wellness. They can:
- Educate members to understand how much to save in the employer plan with a focus on the level of retirement income that can be generated by their accumulated savings
- Provide access to broader financial services and products beyond what’s typically offered
- Equip employees to develop a holistic strategy for retirement readiness that takes into account all the variables for the individual, including current income, other sources of income, and age/savings goals, to ensure that they are making optimal decisions
Employees are interested in support from their employer in a range of financial areas with saving for retirement at the top of the list followed by insurance, understanding finances, and creating a plan.
A successful financial wellbeing program will provide a range of tools, communication, and ‘nudges’ at the appropriate stages of an employee’s working life. For example, the ‘4Ps’ framework (prepare, plan, protect, preserve) for an employer-sponsored financial wellbeing program can serve employees well.
Employers need to improve employees’ engagement in their financial futures by encouraging them to be committed to their overall financial wellness and take responsibility for their own outcomes. Recent studies show that employees need continual encouragement and support to save enough for retirement. Without positive reinforcement and tangible steps, it appears that employees are feeling overwhelmed by general guidelines which may seem out of reach ‒ such as the 70 per cent income replacement standard ‒ and fall into inertia.
Without help from employers, employees’ good intentions may remain unfulfilled. Our research shows that there is a clear opportunity for employers to improve employees’ engagement in their financial futures. CAP members have good intentions and hopes for their lives after work, but they can’t turn these dreams into reality without proactive support from employers.
* Capital accumulation plans (CAPs) include registered defined contribution (DC) pension plans as well as group registered retirement savings plans (RRSP), deferred profit sharing plans (DPSP), and group tax free savings accounts (TFSA).