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Canada's aging population, combined with increased life expectancy, pose a real challenge for our pension plans. Current and future retirees risk seeing some of their sources of income decline or, at best, stagnate.

Data released by Statistics Canada shows that , rising from 81.3 years in 2022 to 81.7 years in 2023.

In the province of Québec, life expectancy has increased significantly, climbing to 86 years in 2021 for people who reach the age of 65, compared to 78 years in 1927, according to a study by .

As coordinator of the , I am concerned about the decline in defined benefit (DB) plans since it diminishes the income of future retirees. Defined benefit plans pay pensions for the entire life of retirees, until their death.

The pension system

The pension system can be thought of as a three- or four-story house. In Québec, the first two floors represent the and the . These two plans allow retirees to receive pensions until their death, and the plans are guaranteed and indexed annually to the Consumer Price Index.

The third floor has different types of plans.

In addition to individual savings products, such as Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs), group plans are available in some workplaces so that employees can contribute to, and then enjoy retirement income when they retire. The two main types of group plans are defined contribution (DC) plans and defined benefit (DB) plans.

Individual savings products and certain employer plans, such as DC plans, allow employees to accumulate capital that will be paid out during retirement. The payout is made using products offered by insurance companies or private financial institutions. Individuals are responsible for their own assets, must manage their money and they assume the risks on an individual basis.

However, it should be noted that approximately half of working people .

Replacing DB plans with DC plans

The problem in recent decades has been the decline in the proportion of people working in the private sector who are covered by DB plans. As a result, more employees must rely on individual savings or DC plans to finance their retirement. These individuals are therefore financially vulnerable and must assume the risks associated with withdrawing their savings, such as not having enough money to last until the end of their lives.

As life expectancy increases, new retirees must plan to withdraw their wealth from individual savings or defined contribution pensions over a longer period of time.

Increased life expectancy and disbursement

What could be the impacts of this situation? When disbursement is spread over a longer period of time, the monthly amounts that can be paid out are lower.

For example, for the same level of assets (let's say $400,000), the monthly amounts paid out over 15 years will be higher than those paid out over a 25-year period.

Retired individuals may live longer than the expected payout period, resulting in certain sources of income drying up or significantly decreasing. Financial difficulties may therefore arise at the end of life, and difficult decisions may have to be made as retirees' cognitive abilities decline.

An idea for DC plans

In Québec, actions have already been taken by pension regulatory and supervisory bodies to provide lifetime pensions to DC plan participants. , allows DC plans to set up payment terms that provide pensions for the entire life of the retiree.

Québec followed the federal government's lead by legislating that DC plans could pay lifetime pensions.

One of the limitations of these lifetime annuity schemes is that the small size of the scheme's assets will not allow for a reduction in management fees. Generally speaking, the larger the assets under management, the lower the fees.

But Canada could go further. The United Kingdom, for example, established the National Employment Savings Trust (NEST) in 2012 to collect and manage contributions from employees who do not have a pension plan offered in their workplace. Employees and employers pay contributions into the trust. NEST's management fees are 1.8% for contributions and 0.3% of assets under management.

The advantage of this type of public scheme amid rising life expectancy is that management fees are generally lower than in the private sector.

The assets accumulated in this organization through contributions can be withdrawn gradually over a lifetime, while allowing money to be withdrawn in emergencies. This is a more structured approach that Québec and the Canadian provinces could draw on to improve the disbursement terms of defined contribution plans.

An idea for public plans

Québec and Canada's public plans (the first and second tiers of the retirement income system) pay pensions indexed to the Consumer Price Index. But other indexation methods exist elsewhere in the world. Some countries, for example, index public pension plans to wages or the cost of living.

Several organizations have already proposed that . This would ensure that pensions increase more quickly, since wages rise faster than inflation.

A more advantageous indexation method for retirees is the one used in the United Kingdom. It consists of indexing pensions to the highest of the following factors: consumer prices, wages or 2.5%. It has been nicknamed the .

The calculated that when the Triple Lock indexation method was applied to the Québec Pension Plan, QPP pensions would increase more rapidly than with the Canadian method.

So, solutions exist to improve the payout terms of defined contribution plans, as well as the indexation method for public plans.

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