Retiring into the Unknown

Most of the carnage wrought by the economic crisis that's ripped through the country over the past year is obvious: the lost jobs, the bankrupt companies, the shuttered manufacturing plants. But a bigger and far less visible effect of the financial meltdown has been the way it decimated the retirement plans of millions of Canadians in just a few cruel months.

Four years ago, Chris Morales and his wife, Sally, moved to Wasaga Beach, a few hours north of Toronto - a move he envisioned as the first step toward semi-retirement. But lately, the 51-year-old has had to downsize in ways he'd never expected. It started when he lost his advertising industry job last August. Morales cut out the travel he and his wife once enjoyed, as well as the practice of leasing new cars every few years. He has since started his own consulting company, but he has had to dip into his rainy-day fund to do it. Now savings are a big concern, he says. All of the money he diligently put away in RRSPs over the years has taken a hammering. "As you look forward you go, wow, do I keep contributing? What's the value of it going to be when you really do need it 15 years from now?" Morales once dreamed of retiring by age 56. "That's not going to happen," he says. He now expects to be hard at work for at least another decade.

Nobody escaped the steep market downturn of the past year. But for those nearing retirement, who have done most of the saving they're likely to do in their lifetime, it was disastrous. Jobs will one day return and plants will reopen, but for many the past several months have taken a toll on their nest eggs from which they may never recover. In the process, the crisis has uncovered a deep and growing problem for the middle class. At one time, most working Canadians would have been okay despite the market collapse, because they could count on their employers to fund their golden years with reliable PENSIONS. Now, according to a recent study by the C.D. HOWE INSTITUTE, less than 20 per cent of those working in the private sector have a guaranteed pension plan, and that figure is declining. That leaves 80 per cent of Canadians in the private sector to fend for themselves, and they're not doing it well. In the last half of last year, the net worth of Canadian households dropped by eight per cent, or $14,000, on average, according to a recent Statistics Canada report, and it's still going down. Last year also proved one of the worst in over 25 years for equity funds - a popular savings vehicle for those looking to grow retirement savings - with losses exceeding 20 per cent, according to Morningstar Canada. And such funds have continued to lose money this year, falling between five and 10 per cent in both January and February.

Even those with pensions are starting to get nervous as they read about huge and growing deficits. One of the largest pension plans in the country, the Caisse de dépôt et placement du Québec, announced last month that the value of its assets had dropped by $40 billion, or 25 per cent. OMERS, a large pension fund for Ontario municipal employees, reported a loss of $8 billion last year. Air Canada's pension is facing a $3.2-billion shortfall and some retirees are wondering what will happen if the company is once again forced into bankruptcy. In fact, most pension plans are experiencing some degree of solvency deficiency, says Dan Braniff, who heads the advocacy group the Common Front for Retirement Security. That has prompted many large companies to start pushing to reduce the amounts they're required to pay into the plans - a troubling move for retirees, who risk seeing their payouts drop significantly if a company goes bankrupt with its plan in deficit.

Still, those with pensions are definitely the lucky ones. As long as their employers don't go bankrupt, their retirements will likely be comfortable. It's people like Roy Furlani Jr., who worked for nearly 30 years as a nickel miner and was rewarded with no pension at all, who will be in real trouble. Until last year, when the 47-year-old was laid off from his job at Xstrata's Sudbury mine, he made $24 an hour working the dangerous underground job. But he lived day-to-day and didn't have the money to save for the future. Any money he did have put aside evaporated when he was out of work after damaging his back on the job several years ago. Had Furlani been able to work just a few more years for the company (he'd moved from being a contractor to a full-time employee just seven years ago), he would have qualified for the company pension. But now, with no house, no savings and no job prospects, his future is suddenly looking bleak. "It's not only heartbreaking," he says, "but demoralizing."

Without a pension, or with a weaker "defined contribution" plan that doesn't guarantee annual payout amounts, people such as Furlani are generally left to their own devices to plan for retirement. Even in boom times - when people should have had more money to save - this proved to be a difficult task. "Credit and household debt have been increasing very dramatically in the last decade," says Tom Hamza, president of the Investor Education Fund, adding that savings levels actually briefly went negative. One-quarter of Canadians have neither an RRSP nor a pension plan, according to STATISTICS CANADA. In the current economic climate, it's suddenly a problem that's not easily ignored. "People's confidence in the boundless economic good news that was coming forward has been shaken fundamentally," says Hamza.

That crisis of confidence has sparked a more urgent search for solutions. In the federal budget earlier this year, the government said it would set up a task force this spring to recommend ways to improve financial literacy. Hamza, who's anxiously waiting to see what will come of the task force, argues that financial education is something that needs to begin as early as high school. Managing money, after all, is a complex job, and hiring an independent financial adviser is a luxury few middle-class families can afford. At the end of their day, many people simply don't have the time or inclination to sort through the competing sales pitches from companies offering advice and services.

That's why many argue that the real fix lies not in education, but in reforming the pension system. Today's system is one of two solitudes, explains Malcolm Hamilton, a partner with human resources consulting firm Mercer. There is a substantial plan for public servants, and then there is a spotty system in which some companies offer plans of differing qualities to their employees. With some rare exceptions, the private system has smaller benefits, substantially higher risks and higher operating costs. This, says Hamilton, "is something that needs to be addressed."

Increasingly, retiree groups such as Braniff's have been pushing for a more inclusive system that would effectively expand the CANADA PENSION PLAN, offering all Canadians the kind of guaranteed benefits that public workers enjoy. By pooling resources and putting them in the hands of CPP investment experts, there would be less susceptibility to market volatility and more protection for workers whose companies go bankrupt. Bernard Dussault, the former chief actuary of the CPP, is another big proponent of such a system. "When Canadian workers reach 65, 35 per cent find themselves in poverty," he says. A universal system would substantially boost the amount retirees are paid, to as much as 70 per cent of their career earnings. Dussault argues that such a plan would only work if it were mandatory. "Everyone would like to have savings," he says, "but not everyone likes to save."

Mercer's Hamilton argues a gentler approach may be in order. He's not opposed to a universal system, but suggests that it should offer members the ability to opt out of the plan. No matter how the system is fixed, whether it's through large provincial plans or a national plan, the important element, he says, is to make plans more widely available to employers of all sizes. More likely than not, employers, especially small businesses who now find the costs of offering plans prohibitive, would jump at the chance to offer these benefits. "If people yawn and ignore them, that's the time to step back and say, 'do we need to somehow compel people?' "

The recent financial meltdown finally seems to be spurring governments into action. B.C. Premier Gordon Campbell is proposing to launch a new province-wide plan next year, which employers, employees and the self-employed could voluntarily join. There is some speculation that Alberta - which along with B.C. has studied pension reform - and perhaps even Saskatchewan could follow suit. The plan will likely be a group retirement savings vehicle without a guaranteed payout, but it would give residents easy access to professional investment managers. Meanwhile, the federal government has been holding hearings into ways to strengthen the pension system on a national level. Dussault, who represents the National Association of Federal Retirees, appeared last week to push for his expanded version of CPP, and he says the government seems to be receptive.

Such changes could be a blessing to Canadians like Morales, who earned money for decades in an industry that didn't offer pensions, and for those like Furlani, whose pension and retirement security vanished along with his job. "We all got screwed out of our benefits," he says. "We ended up with nothing more than the right to say that we worked for Xstrata."

Maclean's April 6, 2009