Retire without a pension? How to generate retirement income in Canada

Those times are long gone. The number of Canadians covered in the workplace by some form of retirement savings program – from the gold standard defined benefit (DB) plans to the more recent risk-sharing model of group RRSPs – has been steadily declining for decades.

Where have all the employer pension plans gone?

Company pension plans are on the decline as employers grapple with costs, investment risks (in the case of DB pensions) and a trend toward greater reliance on contract workers. In the 30 years between 1989 and 2019, the proportion of all Canadian workers covered by registered pension plans fell from 43% to 37%, according to the Federal Office of the Superintendent of Financial Institutions (OSFI).

This rate of erosion is a cause for concern. But it gets worse when you drill down into the data. The continued proliferation of DB pension plans in the public sector masks a significant — and deeply worrying — trend in the private sector. Many employers have converted their DB plans to a defined contribution (DC), hybrid, or other type of plan that involves less risk for themselves and more uncertainty for employees. Between 1989 and 2019, the number of people enrolling in DB programs fell from 85% to 39%, and participation in DC plans also fell from 30% to 17%. (Read more about the differences between DB and DC retirement plans.)

“The retirement landscape has changed,” said Michael Kovacs, CEO of Harvest Portfolio Group. “For many, traditional retirement planning has relied on receiving income from an annuity or withdrawing from a fixed amount of capital savings. These would be supplemented by Canada Pension Plan and Old Age Security payments, and fixed assets such as bonds and GICs. That is no longer the case.”

The challenge for Canadians, Kovacs said, is finding ways to turn their retirement savings into income. This is especially important as Canadians live longer and retirees have a greater need to preserve or even grow capital over a number of years.

Replace pensions with savings and investments

On the positive side, the decline in pension coverage was somewhat offset by greater opportunities to save and invest on a tax-deferred and even tax-free basis. In 1990, as the decline in pension coverage became apparent, the federal government increased the maximum annual contribution to registered retirement benefit plans (RRSPs) from 10% to 18%. Meanwhile, the old caps on maximum contributions were linked to annual wage increases to allow individuals to save more as income increased. In 2023, the maximum contribution is more than $30,000.

Also, the rules for holding non-Canadian investments in RRSPs were relaxed, and in 2009 the federal government created the Tax-Free Savings Account (TFSA), which offers a great way to grow wealth on a tax-free basis. Withdrawals are also tax-free.

But these savings and investment opportunities are not a panacea. Retirement provision is a complex topic that is shaped by many forces. For example, employers are increasingly relying on contract or temporary workers to meet their staffing needs. (A 2021 survey by staffing firm Ceridian found that nearly two-thirds of expected freelancers or gig workers would essentially replace full-time employers over the next five years.) That means fewer Canadians are receiving benefits like RRSP matching.