TORONTO, Dec. 11, 2013 /CNW/ - Low investment returns loom in the
decades ahead, spelling bad news for retirement savers and pension plan
managers, according to a report released today by the C.D. Howe
Institute. In "Long-Term Returns: a Reality Check for Pension Funds and
Retirement Savers," authors Richard Guay and Laurence Allaire challenge
widely used "optimistic" assumptions for investment returns based on
historic experience, with more realistic ones using current Canadian
"Some pensions could face bigger pension liabilities and individual
savers will have to save more or work longer, if they are to avoid a
large drop in their post-retirement lifestyles," commented Richard
In the report, Guay and Allaire demonstrate why pension plan
administrators and individual savers should avoid using historical
rates of returns to forecast future returns. They provide their own
forecast for long-term investment returns on a balanced portfolio of
bonds and stocks using current and prospective market information.
Guay and Allaire predict long-term returns in the neighbourhood of 2.5
percent (0.5 percent real) on long-term bonds and of 6.9 percent (4.8
percent real) on stocks. For a balanced portfolio (50/50 split), they
therefore expect a real return of 2.7 percent for the next decade. By
contrast, the average expectation for real returns among Canadian
pension funds is 4.3 percent, they note.
The authors draw implications for pension funds and individual savers.
"Defined-benefit pension plans should acknowledge these realities,"
said Laurence Allaire, "Adjustment might be required, which will be
difficult, to reduce costs and deficits to acceptable levels."
The authors also show how lower returns will affect individual savers
who have different incomes and income-replacement targets. For example,
for a saver to reach the popular target of 70 percent income
replacement for a $50,000 final income, the necessary savings rate,
over 30 years, jumps from less than 10 percent of gross annual salary
to 14 percent of salary. Or, savers can work longer.
"More realistic return assumptions mean individuals should save more for
their retirement or postpone retirement for two years to enjoy their
desired lifestyles, said Guay.
For the report go to: http://www.cdhowe.org/long-term-returns-a-reality-check-for-pension-funds-and-retirement-savers/23785
The C. D. Howe Institute is an independent not-for-profit research
institute whose mission is to raise living standards by fostering
economically sound public policies. It is Canada's trusted source of
essential policy intelligence, distinguished by research that is
nonpartisan, evidence-based and subject to definitive expert review. It
is considered by many to be Canada's most influential think tank.
SOURCE: C.D. Howe Institute
For further information:
Richard Guay, Professor of Finance, UQAM and Fellow, CIRANO; Laurence Allaire Jean, former Project Director, CIRANO Finance Group; Alexandre Laurin, Associate Director of Research, C.D. Howe Institute, 416-865-1904; email: email@example.com.