A must read article in the Globe and Mail on Saturday from the President of the CD Howe Institute, points out rarely admitted facts about the return assumptions that have been baked into most pension and retirement planning forecasts. This is something I have been trying to educate people on for many years. In saving plans it is important to be conservative in return expectations. To over-expect is to under-save and make risky bets with capital that creates insurmountable deficits over time. Believing in false prophets (and profits) in the investment industry is a fatal error. Read: Assuming big returns on pensions–what could go wrong? (plenty):
What returns can we earn on our saving? In planning for retirement, few questions matter more. Project prudently and all should be well; count on a bonanza that falls through – not so good. What is true for individuals is true for pension plans. Those that forecast conservatively and back their obligations well tend to pay what they promise; those assuming turbo-charged returns to fund rich benefits on the cheap might not. So far, the debate over a bigger Canada Pension Plan (CPP) and the Ontario Retirement Pension Plan (ORPP) has skirted this question.
The going assumption – explicit in the ORPP’s numbers; implicit in conversations about “fully funded” CPP expansion – is that assets in these plans will earn 4 per cent annually in real (inflation-adjusted) returns over decades. Few people have noticed this…
;
