A digital fix to Canada’s gaping retirement gap – Wealth Professional

Co-founders of Common Wealth explain how they developed a better retirement saving option for the average Canadian worker

A digital fix to Canada’s gaping retirement gap

Ask any Canadian to name the life milestones they should be planning for, and chances are retirement will land in the top three. But even with that awareness, a large swathe of Canada’s working population is woefully unprepared for life after gainful employment.

In a 2020 report, the Aegon Center for Longevity and Retirement (ACLR) said that globally, workers expect they’ll need to replace two thirds (67%) of their current income in retirement, but just 35% of Canadians think they’re on course to hit that goal. Less than half of Canadian respondents (42%) said they constantly save for retirement; 26% said they save only on occasion, and 15% said they don’t save enough but plan to.

More recent research from Healthcare of Ontario Pension Plan (HOOPP) and Abacus suggests things haven’t gotten much better. Drawing from an April 2021 survey of 2,500 Canadians, they found that even though 46% of were able to save more money during the pandemic, nearly two thirds (63%) of all respondents haven’t been able to set aside anything for retirement in the past year.

It’s a problem that Jonathan Weisstub, co-founder of digital retirement-planning firm Common Wealth, knows all too well.

“We’ve done some extensive research on retirement, both on our own and in partnership with reputable institutions like HOOPP,” he said. “One of our most significant findings is that Canadians, by and large, are falling short with the individual options for retirement saving and investing.”

Toward an efficient retirement-saving vehicle

In a report titled The Value of a Good Pension: How to improve the efficiency of retirement savings in Canada, Common Wealth and HOOPP found that compared to individual saving, a pension-based retirement arrangement creates additional value for working retirement savers through five drivers: automated and consistent savings, lower fees and costs, professional investment discipline, fiduciary governance by in-house professionals, and efficient pooling of investment and longevity risks.

“Taken together, we found that those five drivers can help a top-performing retirement plan drive roughly $890,000 in lifetime savings versus an individual approach that achieves the same level of retirement income,” Weisstub said.

But given the options in Canada’s retirement planning landscape, a large number of Canadian workers are still being left behind. Recognizing that current workplace plans don’t consider the needs of smaller employers and lower-income Canadians, Common Wealth set out to develop a technology-enabled retirement savings and planning platform.

“Even though millions of Canadians have been asking for help with retirement for years, we didn’t see any modern technology solutions that addressed the problem of retirement planning and saving for the average Canadian,” said Alex Mazer, Common Wealth’s other founder. “That’s why we built our company and why we built this platform.” 

The Common Wealth platform, which the company designed to be Canada’s first digital retirement plan for life, takes members through a one-on-one digital enrolment process; after 15 to 20 minutes, they’ll have a personalized retirement plan.

How to make a DIY pension plan

The onboarding process begins with the system asking for a member’s current income, age, and planned retirement age. Using those parameters, it determines an appropriate retirement income/replacement rate, which is based on assumptions for retirement-planning projections set out by the FP Canada Standards Council.

After that, users are prompted to input details on the investment and savings vehicles they currently use. With that information, that platform provides a projection of how much retirement income they can expect to receive from their existing savings, an estimate of how much they can expect in government benefits, and education on how to maximize those benefits.

“From those savings and future retirement income sources, the system tells users how much of a retirement income gap they’d still have to fill,” Mazer said. “We’ve found that having a concrete target for retirement saving helps lessen people’s retirement anxiety.”

As they go through the enrolment process, users are given in-app tool tips and links to education on the different decisions they need to make. Because Common Wealth is fanatically evidence-focused, the guidance provided within the platform draws heavily from established academic and industry research.

For many Canadians, deciding between an RRSP or a TFSA can be a very confusing process. The platform makes that a little easier for members by giving suggestions on how they should allocate their savings, with TFSAs being prioritized for modest earners. In cases where the employer offers matching contributions, the member can also decide to maximize their employer match with the option to increase their own payroll contribution.

“Members can transfer in existing TFSAs and RRSPs to consolidate their savings and take advantage of the plan’s low fees, as well as add monthly contributions from their own bank account,” Mazer said.

Common Wealth also allows members to access LifePath target-date funds from BlackRock, making it the first provider in the Canadian market outside of insurance companies to do so. Because they are rebalanced over time according to a member’s age – specifically, fund managers de-risk a given target-date fund’s underlying portfolio over time to create a “glide path” toward the unitholders’ projected year of retirement – they have the potential to provide better outcomes compared to other kinds of investment funds.

“In one recent study, Wharton’s Pension Research Council found that plan members using target-date funds experienced materially better returns than those using other kinds of funds,” Mazer said.

Aside from that, members on the Common Wealth platform may opt to get additional guaranteed lifetime income through deferred annuities provided by Brookfield Annuity, the first Canadian company to focus on providing pension de-risking solutions through group annuity policies.

Through the platform, members can choose to invest in the annuities over time in automatic monthly amounts, or they can make a lump-sum contribution to an annuity. They may also choose how much guaranteed income they want from the annuities, as well as when they want to start receiving the payments.

“The platform allows Canadian workers to essentially create as close to their own defined-benefit pension plan as possible with the purchase of a deferred annuity,” Mazer said.

For employees who want to top up their plan with monthly contributions, the platform gives the user a recommendation for how much they should automatically save every month. The user can overrule that based on their more immediate needs and expenses, in which case they would be presented with a catch-up option where they’d save more later to make up for lost time.

“This ‘auto-escalation’ feature lets members commit in advance to a scheduled series of contribution increases, and users receive a notification each year to inform them of the upcoming increase,” Mazer said. “With group education and regular checkups, the platform also helps members stay on track and maximize their plan’s value.”

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