Posted: Thursday, 11 August 2011

by Ken Georgetti

Just when you thought the 2008 global financial crisis was an ugly memory, the stock-market roller-coaster is back with a vengeance, and we’re along for the wild ride.

Across the world, investor fears over sovereign debt and sluggish growth have ignited a loss of confidence and a flight from risk. Since the beginning of August, the S&P/TSX Composite has lost 8.5% and the Dow Jones Index is off nearly 11%. Other world markets are suffering similar losses.

Workers trying to save for retirement are watching in frustration and disbelief. In the space of a week, Canadians with equity mutual funds have watched 10% of their retirement savings evaporate.

The latest gyrations come less than three short years after the last gut-wrenching plunge in equity markets. In between, indexes like the TSX did not even manage to return to their previous highs – which is why many RRSP portfolios have failed to recover from devastating market losses three years ago. Mutual fund investors in Canada have, in the meantime, been charged management fees which are among the highest in the world. Whether you win or lose at the blackjack table, it seems, the dealer takes a cut.

To be sure, all of this turbulence is good for hedge funds and speculators, who rely on market volatility for outsized returns. But is this any kind of sane way to ensure that retired workers have decent incomes in old age?

The current market swings are a reminder of just how costly and irrational the shift from defined benefit to individual savings plans really is. Think about two individuals retiring this week from a lifetime of work. Steve is a member of a large defined-benefit pension plan, and knows exactly what his retirement benefit will be. That’s because pension plans, which pool risk across generations and spread it over many years, can roll with the market punches and recover from temporary losses far better than individual portfolios.
 
The Canada Pension Plan is a perfect example. Canadians retiring this week with a CPP pension will get the full amount to which they are entitled, as will those retiring next year and beyond. Large funds like the CPP have professional investment managers who typically secure higher returns than small-fry investors, who lack the knowledge and access that institutional investors enjoy. As a member of a defined-benefit pension plan, Steve can proceed with his retirement plans despite the market turbulence, confident in the knowledge that his retirement benefit is secure, protected against inflation, and provided for life.

Imagine Ted, on the other hand, with a Registered Retirement Savings Plan (RRSP). Unlike many of his friends, Ted has been lucky to have an employer who chose to offer a group RRSP at work, even if Ted’s boss opted not to pay into his RRSP. Ted has dutifully contributed a portion of every pay cheque for years, in anticipation of his retirement date. But for Ted, as with other individuals with retirement savings in private individual accounts, everything depends on market conditions. The drop in the value of Ted’s retirement portfolio on the eve of his retirement means that he will either have to put up with a permanent loss of retirement income, or postpone retirement until he can recoup his losses – with no guarantee that markets will rebound even three years from now.

Make no mistake, defined benefit pension plans also lost money during last week’s carnage in equity markets, but only about four percent of total assets – far less than the haircut small investors received. But most importantly, time is on the side of pension plan members. This is not so for retail investors with individual retirement savings accounts.
 
Three years ago, the Prime Minister reassured us that a tumbling stock-market signalled new buying opportunities. Great advice for high rollers, but not so good for Canadians trying to plan for retirement. Amidst persistent market turmoil, it's clear that we need the stability and protection of Canada's secure and enduring national pension plan more than ever. It's time to expand the CPP.

Ken Georgetti is president of the 3.2 million member Canadian Labour Congress.