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Baby boomers reaching retirement age puts more pressure on pension plans

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OTTAWA - The leading edge of Canada's baby boom is turning 65. Just don't expect their pension plans to blow out the candles.

Wheezing and winded from years of volatile stock markets, historically low interest rates and staggering billion-dollar deficits, traditional pension plans have been struggling to catch their breath from the 2008 financial crisis.

There's a growing sense in the pension industry that the days of hoping for higher interest rates and stronger market returns are at an end, said Laura Lynch, a senior retirement consultant at Towers Watson.

"Many of the Canadian pension plans are getting close to their retirement years," Lynch said.

"Like the members of the plans, who as they get close to retirement cannot stomach the same levels of volatility, companies are finding that they also cannot stomach the volatility."

The first of the baby boom generation reached 65 in 2011, while those aged 60 to 64 proved the fastest growing of all age groups, expanding at a rate of 29.1 per cent between 2006 and 2011, the latest census figures released Tuesday by Statistics Canada indicate.

For the first time, the census found, there were more people aged 55 to 64 — an age at which people typically start leaving the workforce — than were aged 15 to 24, an age when people typically start their working careers. That's a scary omen for pension funds that are dependent on workers to help fill the coffers.

And that ratio will continue to decline, said Laurent Martel, a senior demographer at Statistics Canada.

"The number of those leaving the labour force will be even more important in the forthcoming years as this large cohort of baby boomers will leave the working age population," Martel said.

Nearly two-thirds of respondents to a recent Towers Watson study said they believe Canada is mired in a pension crisis that will be long-lasting and is only going to get worse over the coming year.

Say what you will about Canada's baby boomers, one thing is for sure: they have lousy timing.

Beginning in 2023, the federal government is gradually shifting the age of eligibility for old age security and guaranteed income supplement payments from 65 to 67 — a move that's expected to put millions of dollars back in the federal coffers.

Most pension plans, however, don't have that luxury.

And while defined-contribution pension plans — essentially company-sponsored savings plans — have gained popularity in recent years, the generation that's poised to enter its golden years over the coming decade has largely been unaffected by the shift.

Some Towers Watson clients in Calgary have increased the early retirement age in their plans in an effort to keep experienced staff, while easing some of the potential pension pressure, but those changes are not easy, Lynch said.

"It is something that must be approached (with the) understanding how complex it is both from a legal perspective, but also from a human resources implications perspective."

In 2011, 68.5 per cent of the Canadian population was part of the "working age" population of 15 to 64, but that is set to change. Of that group, 42.4 per cent was aged 45 to 64 last year, significantly more than the 28.6 per cent that was registered in 1991.

Companies in the short term will be OK, but pension plans will surely be tested if interest rates remain low and the proportion of retirees continues to grow, credit rating agency DBRS has warned.

Peter Schroeder, a managing director at DBRS, said companies will have little choice but to invest more cash in their pension plans if interest rates don't start rising soon.

"They can contribute more. That is their only option."

Indeed, some of Canada's biggest corporate names have poured hundreds of millions of dollars into their pension plans over the past couple of years.

Canadian Pacific Railway Ltd. (TSX:CP) made $600 million in voluntary contributions to help its pension plan last year, while Canadian National Railway Co. (TSX:CNR) made a $350-million pension contribution for 2011.

Meanwhile, BCE (TSX:BCE) made a $750-million voluntary payment to its defined benefit pension plan in December. Telus (TSX:T) made a $200-million contribution to its pension fund in January 2011 and another $100 million in January 2012.

Pension plan managers aren't the only ones who fear the coming financial crunch. Ordinary Canadians, too, are feeling pinched.

Though Ottawa has offered up a host of new tax-sheltered savings incentives, such as tax-free savings accounts and pooled pension plans, Canadians are still struggling to save.

Squeezed by the cost of caring for aging parents, many also face the expenses of helping support adult children struggling in a difficult job market.

Dave Allison, a civil servant who retired early from government, continued to work full-time for another decade as a consultant and project manager after leaving the civil service.

"I needed to work," Allison said. "Even though I was on a pension, it was not what people would consider a full pension."

Now 68, he continues to work three to four months a year, doing short-term subcontracting work even though the financial need has eased.

"I've enjoyed my work the last 10, 15 years a lot more than I enjoyed it the last 10 years of my official career," said Allison, whose own father retired at 55 and didn't work another day after that.

"If you still have your health and the interest in working, then you have the opportunity to look for things that are more interesting, things that you might not have been able to do."

A recent Royal Bank survey found that more than a third of baby boomers who responded are worried they won't have enough money to finance the retirement they want. As a result, retirement in the 21st century is starting to look a lot like part-time work.

Mike Michell, national director for small business at Royal Bank, said since the last recession, the bank has seen a significant increase in the number of older entrepreneurs who are starting their own businesses.

Many of them suddenly found themselves downsized out of a job, while others decided they'd simply had enough of the daily grind, so they decided to try going into business on their own terms, Michell said.

"What we are seeing more and more of are people who have had a career, who have been employed, who are starting to put their shingle out."

And while most cite financial need as their primary reason for shirking the traditional trappings of retirement, working later in life is simply becoming a lifestyle choice for many who simply aren't ready to spend their days on the golf course.

"You did see a lot of people, whether it was voluntary or not, start to go out on their own in that age demographic and say, 'I still have a lot of energy, I have a lot to contribute, plus I also have a lot of contacts in the market,'" Michell said.

Again — another degree of flexibility pension plans simply don't have.

Large companies with big pension deficits and a growing list of retirees have little choice other than to inject their pensions with more cash —which means less cash to finance future growth or to pay dividends to shareholders.

Canada isn't alone with its aging population and stands with one of the youngest populations in the G8. Only the United States and Russia had a lower proportion of seniors than Canada.

There's still time on the clock — the true test for pension plans is likely two decades away as the second wave of baby boomers reaches retirement age. "It's 10 or 20 years before we truly know how well funded these plans are," Schroeder said.

In pension terms, however, 20 years is nothing, warned Lynch.

"You need to deal with things well in advance because a short time horizon for a pension plan is probably 10 or 15 years," she said.

"You need to start planning now in order to have a sense of what might you do, when will you do it, how will you do it and be ready to move."

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