As we think about the solutions to increase pension coverage and the adequacy of pension savings for women working in the private sector, we need to consider the following factors.
Many women face interruptions in their working career, generally to take care of children and other family members. These interruptions translate into fewer years of potential pension coverage for women who have access to a pension plan.
As women leave and re-enter the labour force, they most often transition into new jobs. This means that new waiting periods must be observed before they qualify for membership in a new pension plan.
We know that part-time work is more prevalent among women than men. Part-timers may accrue significantly lower pension accruals during their working period, which can easily range from a decrease of 20% to 40% compared to full-time employees.
Women still have a longer life expectancy than men at retirement, which translates into the need to accumulate additional pension savings. Under current economic conditions, women may need to save between 8% and 10% more than men to maintain the same standard of living during retirement.
As we examine ways to increase coverage for women in the private sector, we need to consider new pension models that offer flexibility to accommodate women's working patterns. Solutions should also consider the longer life expectancy of women as well as the need for portability. Increasing pension coverage is of course more urgent for smaller firms, as well as for industries that do not offer pension plans.
Traditionally, the vast majority of pension plans have been either defined benefit or defined contribution plans. There has been a growing concern among employers about the financial risks associated with DB plans, which has been amplified by the current economic conditions. In response to this concern, many companies have now closed their DB plans. While some have replaced them with DC plans, there are concerns that many such plans will not provide an adequate income replacement stream for retirees. These concerns highlight the need for flexibility in developing possible ways of increasing pension coverage and suggest that plan designs beyond the typical DB and DC spectrum be considered.
One possible solution to the coverage issue is to expand the public pension system. For example, Alberta and B.C. are proposing the creation, either nationally or regionally, of a voluntary supplementary DC plan on top of the existing Canada/Quebec Pension Plan. While there are many ways to add another layer of C/QPP, the fundamental idea is to implement a provincial or national plan targeting Canadians not covered by an employer-sponsored pension plan. While the current public pension system, including OAS, GIS and C/QPP, should replace between 30% and 40% of income for average workers, the additional layer could potentially increase their income replacement ratio to a range varying between 50% and 70%.
Another potential solution is to focus on increasing coverage and pension savings among small and medium-sized companies. One way to do this is to encourage the formation of multi-employer plans that can be industry or trade based. The advantage of multi-employer plans over a second tier of C/QPP is to add flexibility and to actually meet the special needs of employees in different companies or industries.
Under a DC approach, the employer would contribute a minimum fixed amount with a corresponding employee contribution. For example, a 2% contribution from both the employer and employee could bring the income replacement ratio for the average worker to a total target of approximately 50% to 60%, including OAS and C/QPP. Employers would have the opportunity to contribute additional amounts as they wish. Additional employee contributions would be encouraged by the fact that employers would be able to make matching contributions aligned with each employer's desire to contribute. In addition to increasing pension coverage and savings, women participating in these plans would be able to contribute during their years of unemployment as well as to complement their pension savings during their part-time working years.
These larger funds would benefit from lower management fees and professional investment management oversight.
Partial and gradual annuitization should be offered among these plans to guarantee an income during retirement. It could even be mandated to a certain extent to ensure a minimum guaranteed income at retirement. By gradually converting a small amount of the accumulated pension savings each year into a lifetime annuity, a guaranteed income would be built over the years. Unisex rates should be used in the purchase of these annuities.
An alternative to a DC model would be to implement a plan with a target DB where risks are pooled among plan members. Under this approach, the employer contributions would also be limited to a fixed amount. In the case of asset insufficiency, benefits could be reduced. This model allows for the pooling of longevity risks as well as for the pooling of investment risks between generations. These plans also benefit from lower management fees and professional investment management oversight.
There is clearly a need to expand pension coverage and increase savings for Canadian women working in the private sector. To achieve this expansion, we need to develop new ways for women to save for their retirement, as well as to alleviate for the lower pension savings due to the non-traditional working patterns.
In summary, the key elements to consider include increasing coverage through the creation of multi-employer plans or national or provincial plans, encouraging additional savings through adequate employer matched contributions, increasing pension savings through access to a pension plan in years of unemployment or part-time work, and providing access to larger funds to benefit from lower management fees and professional investment management oversight.
Thank you very much for providing us with the opportunity to address pension coverage issues for women working in the private sector.