This question was recently asked in an Internet poll.
At the time of the poll, 45% of the participants indicated that the crash had hurt them a lot. Another 30% indicated that they had been hurt a little, while 26% indicated that they hadn’t been hurt at all.
The surprising statistic isn’t the 45%, but rather the 26% who indicated that they hadn’t been hurt.
Undoubtedly, there are people who haven’t invested in equities who believe they haven’t taken a hit. Perhaps, some haven’t. However, it’s likely that a lot of people who believe they haven’t been affected have been hurt more than they can imagine.
The impact that this market downturn has had on pension fund viability and the viability of RRSPs hasn’t been fully realized as of yet; well-run pension funds that prudently invested have been hurt significantly. RRSPs with conservative investment strategies have been greatly damaged.
An acquaintance of mine was relating the other day how people at his place of work are in a state of denial. They just aren’t opening up the latest report from their financial advisor or their latest RRSP report.
Implications for business
1. If your company has its own defined benefit pension plan, it is likely that your actuary will direct you to increase your rate of contribution in order to improve the solvency ratio of the plan. Given the poor performance of equities and the low return on fixed income over the past few years, it is likely that the required increase will be substantial.
2. Over the last two or three decades, many companies have exited from defined benefit arrangements and have moved to defined contribution plans or group RRSPs. This was seen as a brilliant cost containment move. Administration fees were greatly reduced and all the risk was passed onto the employee.
The majority of these plans will have been hurt by the market collapse. Those who were planning to retire in the next few years will soon realize (if they haven’t already), that they no longer have sufficient money in their accounts to do so. They will realize that if they retire as planned, it won’t be at the level of economic comfort they were hoping for. Remember, we are not yet in a period of price deflation; the cost of living has not decreased in line with the decline in anticipated post-retirement income.
If the market continues to “tank,” the retirement funds will continue to diminish and planned post-retirement income will get smaller and smaller.
This situation will undoubtedly lead to more people working for a longer period of time than they and their employer had previously planned.
In a number of Canadian jurisdictions, mandatory retirement no longer exists. This means that employees have the right to continue to work until they decide to retire.
If an employer forces an older employee to retire against his/her wishes, the employer has a liability for severance and separation pay equivalent to that owing younger workers.
3. Employers/owners may find that their own retirement plans will also have to be altered as a result of a significant reduction in the value of their RRSP or similar investment vehicle. Other than the fact that an owner will have to work longer, it may also have an affect on their relationship with the person that has been designated to succeed them.
The news may not be all bad. The employee’s need to work longer before retirement may mean that the company can retain a special skill set that they had anticipated losing to retirement.
Some employees who had planned on retiring could be interested in part-time work to provide them with additional post-retirement income. This could work to the advantage of both the employer and the employee.
In those cases where an employer has been looking forward to an employee’s retirement because of declining abilities and performance, a plan of action with good reporting will be needed. Impulsive termination of such employees could prove to be costly.
Employers will need to plan what their benefit policy will be for employees who decide to forego retirement at age 65. It is likely that benefit premiums will increase for such employees if the employer decides to keep them in the company’s benefit plans.
The decimating decline in the stock market is likely to have far reaching effects on the way businesses run. Planning ahead has never been more important. The crucial thing is to plan those issues that can be managed and controlled.