Why the value of a defined benefit pension plan goes beyond the pension cheque
With nearly 600,000 members, our mission at OMERS is to provide secure, stable, and affordable pensions to Ontarians who have spent their careers serving the public. In 2022, OMERS paid out C$5.9 billion in pension benefits to 194,000 retired members. But the value of a defined benefit pension plan goes beyond the pension cheque, and I have the great privilege of speaking to members and hearing first-hand how their pension benefits have positively affected their lives.
To better understand the relationship between a secure and stable income in retirement and the health and well-being of Canadians, earlier this year OMERS sponsored a report by the National Institute on Ageing (NIA), a think tank at Toronto Metropolitan University focused on the realities of Canada’s aging population.
The report, Healthy Outcomes: Understanding the Impact of Adequate, Stable and Secure Retirement Income on the Ability of Canadians to Age Well and in the Right Place, reviewed the impact that financial security both before and in retirement has on the physical and mental health and well-being of Canadians. The report examined the relationship among income, income stability (changes in income over time), and economic security (how a person perceives their financial circumstances) on health and the ability to age in the right place, meaning the ability to determine how and where to age. It also shared new findings from the 2022 NIA Ageing in Canada Survey that further examined these relationships, with a focus on these three broad areas of research: income adequacy, income stability, and economic security.
Dr. Samir Sinha, director of health policy research at the NIA and co-author of the Healthy Outcomes report, recently said, “As record numbers of Canadians approach traditional retirement ages over the coming two decades, strategies and initiatives that improve their income adequacy, stability, and security will be critical to enable them to look forward to living the rest of their lives with financial confidence.”
Income adequacy
Measuring how Canadians perceive the adequacy of their income can provide insight into whether they have confidence in their financial resources and their ability to sustain themselves to live and age comfortably while also saving for the future.
The 2022 NIA Ageing in Canada Survey found that Canadians who reported lower levels of perceived income adequacy were less likely to report excellent or very good health compared to Canadians who reported higher levels of perceived income adequacy. Those who reported having excellent or very good health and higher income adequacy were also more confident in their ability to age in the right place.
Some key statistics:
- Overall, 72 percent of Canadians aged 50 years and older said that their income was enough for them (33 percent said that it was good enough that they could save from it and 39 percent said that it was just enough so that they did not have major problems)
- 26 percent said that their income was not enough for them (19 percent said that it was not enough for them because they were financially stretched and seven percent said that it was not enough because they were having a hard time)
Income stability
Income stability describes changes to income over time. Trends over time are important because they capture how having a low income throughout life can result in a cumulative disadvantage to an individual’s health (or vice versa). While changes resulting in increased income can be beneficial, repeated negative changes to income are considered harmful to health.
According to the report, having periods of inadequate income may also reduce an individual’s access to healthcare, leading to insufficient chronic disease management. An unstable income may also increase an individual’s stress, worry, or fear about their current and future financial circumstances.
The Canadian pension system acts as a cushion to reduce income instability in retirement, protecting older adults with a minimum income floor. It also helps mitigate income fluctuations through lower taxes and greater social benefits (such as reduced Guaranteed Income Supplement repayments) when income decreases.
Sudden drops to an individual's monthly or yearly income could be detrimental if the remaining income is insufficient to cover the entire time spent in retirement or if sudden emergencies or unexpected situations require substantial financial resources.
Several studies referenced in the report examined the relationship between eligibility for a public pension and health. Even among low-income individuals, eligibility for a public pension is more likely to be associated with better health outcomes for older adults and a lower probability of experiencing food insecurity.
Economic security
Economic security refers to how a person perceives their present or future economic circumstances. For example, someone might worry about whether they could manage or recover from a future unexpected financial downturn.
The report found that economic security is more strongly associated with mental health outcomes than physical health outcomes. Economic insecurity may negatively affect an individual’s mental health, regardless of income level. A lack of economic security may influence health and well-being through increased stress or anxiety, which, in turn, worsens physical and mental health in the short and long term.
One study outlined in the report indicated that negative mental health impacts can linger even after a period of economic insecurity is resolved. Another study found that economic insecurity negatively affects mental health, even if a temporary drop in household income does not actually occur.
Pensions as social infrastructure
As a leader in the pension industry in Canada, OMERS recognizes a responsibility to raise awareness of the value of having a secure and stable income in retirement, for the benefit of both our members and members of other pension plans, and because we know that a secure and stable income in retirement can play a crucial role in positively affecting local, provincial, and national economic and social well-being. In this regard, pensions can be considered “social infrastructure,” which is critical to ensuring our society remains vibrant, caring, and productive.
With an increasingly greater proportion of the population over the age of 65, access to employer-sponsored pension plans and a secure and stable income in retirement has never been more critical. Demonstrating their value is important to ensuring broad understanding and support for pension plans that have considerable impact on the lives of both participants and communities, including the defined benefit pensions that OMERS provides.
Pension plan members reported that the presence of a defined benefit plan was a compelling reason for them to stay with their employer. This reframing of value has the potential to broaden the appeal of pension plans at a time when the Canadian population is aging and proportionately few have access to a pension.
The NIA research follows the economic and social value research conducted for OMERS by the Canadian Centre for Economic Analysis (CANCEA). The research found that defined benefit pension plans have broad and meaningful value, not just for OMERS members, but also for their families and communities across Ontario. For the member who receives the pension payment, it is a financial value that also provides a better sense of life satisfaction and financial security, higher satisfaction with health, community involvement, and lower stress. It is a valuable retention tool for employers, especially when competition for talent is so strong. And for communities, there is greater likelihood of voluntarism, a high propensity for charitable donations, and less reliance on government financial support.
The findings from the Healthy Outcomes report and the prior social value research reinforce the important role that defined benefit pension plans play in Canadian society and in ensuring that older Canadians are taken care of. Viewed from this perspective, it’s time to have a broader discussion about the role of pensions as social infrastructure. Read the full report at www.omers.com/healthy-outcomes.
Celine Chiovitti is EVP and head of pensions, OMERS
