Inflation and rising interest rates… Three-quarters of respondents to a recent survey go so far as to believe in the emergence of a retirement income crisis.
In the survey conducted at the end of April on behalf of the Ontario Health Care Workers’ Pension Plan (HOOPP), concern over the daily cost of living increased by 11 points compared to the previous year, with 66% of respondents now saying they are very worried. Inflation and rising interest rates are hurting their ability to meet their daily needs, with 85% saying it is impacting their ability to save for retirement. And 63% say they will have to postpone the date. Also, 72% of respondents believe that retirement savings have become a “prohibitive expense”.
The effect is felt more — and by far — among respondents aged under 35.
In terms of real estate, 58% of respondents who do not own their homes are deeply concerned about the impact of rising interest rates coupled with persistently high inflation. An equal proportion of owners are concerned about the consequences of this deterioration in accessibility on their ability to sell their property in order to finance their retirement.
In conclusion, says HOOPP, 75% of respondents believe in the emergence of a retirement income crisis. A crisis that will have a disproportionate impact on the youngest.
Low participation in an RPA
The reading that emerges is all the more gloomy in that a large number of them rely only on public plans and personal savings, while 45% of owners rely on the sale of their home to meet their needs. financials in retirement.
According to Statistics Canada, the proportion of all paid Canadian workers covered by a registered pension plan (RPP) was 37.1% in 2019 and 39.7% in 2020. Two-thirds of participants are covered by a defined benefit plan (DBP), 18.4% by a defined contribution plan (RCD) and 14.4% by another type of plan, such as hybrid, mixed or combined plans.
For DBPs, realized inflation has a direct impact on benefits and influences future payments while increasing the weight of these future commitments on the shoulders of active employees. For their part, changes in inflationary expectations will influence the assumptions used for balance sheet funding valuations, which in turn may affect the plan’s funding needs, says Mercer.
Also, in the absence of indexation or protective measures, an inflationary environment can lead to increased pressure on trustees to increase benefits on a discretionary basis, which will not be without creating tensions between stakeholders. of the regime.
In addition, many RPDs that contain cost-of-living protection clauses offer limited guarantees. Not to mention the play of the time lag between the inflationary surge and the adjustment of benefits.
It is worse for RCDs, beneficiaries and quasi-retirees being among the groups most sensitive to the erosion of the purchasing power of retirement savings. This is particularly painful for retirees on fixed incomes: for the latter, the time horizon to recover any erosion of purchasing power through salary increases is reduced, summarizes Mercer.
Added to this is the effect of rising rates on the returns of a portfolio generally made up of conservative investments and fixed-income securities. Especially since liquidity needs can restrict the choice of more risky assets that offer a hedge against inflation. Certainly, the impact of low yields will be lessened by lower annuity purchasing costs under the discount rate game for those who choose this avenue, “although such an annuity may have reduced purchasing power” compared to the initial objectives.
However, DC plan participants near retirement “who intend to receive a lump sum will likely have seen a drop in the expected benefit amount”. If they opt to purchase an annuity at retirement with inflation protection, “a higher level of protection will significantly reduce the initial amount of the pension”.
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