Give clients more help with savings, investing decisions

It sounds like the country’s finance ministers are coming to the realization that Canada’s public pension system needs some beefing up. The financial services industry should face up to its failure to deliver an effective alternative. At the same time, it should work to bolster private savings.

Federal Finance Minister Jim Flaherty and most of his provincial counterparts are warming to the idea of a more robust Canada Pension Plan. In the months ahead, they may agree on some expansion of the CPP, to shore up basic retirement savings, without imposing onerous new costs on employers.

At the same time, the ministers have also indicated some support for new ways to boost savings, such as multi-employer pension plans, which would be delivered by the private sector.

Although creating more ways to save is surely welcome, the financial services industry shouldn’t just be waiting for governments to create new vehicles to accomplish this goal. Rather, the industry must recognize that, to some extent, the shortfall in retirement savings represents its own failure. While the design features and limitations of existing savings vehicles can be blamed for a small part of the savings deficit, the fact that there is more than $540 billion in unused RRSP contribution room suggests that the industry has fundamentally failed its clients, too.

Canadians aren’t saving enough for the future; instead, they are consuming too much and taking on too much debt. It may be that many of these “bad” financial decisions are not due to ignorance of financial fundamentals, but are actually rational consumer responses to the products and services offered by the industry. Canadians may be discouraged from saving and investing by products that are too costly, due to hefty fees or expensive guarantees that eat up a large portion of investment returns. Poorly performing products, inadequate advice, unfair dealing and a perceived lack of investor protection all encourage people to spend rather than save.

The private-sector solution to the retirement savings problem in Canada is not to wait for policy-makers to create new marketing opportunities. The industry should be looking to improve its value proposition to clients, in terms of the products it produces and the advice it provides, while also seeking to bolster confidence generally with fair dealing, honest, up-front disclosure and greater accountability.

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Investment Executive
IE Staff
June 28, 2010

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