Outdated assumptions, conflicts may be guiding advice on CPP timing: report

Many advisors are using outdated assumptions about when clients should take Canada Pension Plan (CPP) payments, with a conflict of interest potentially influencing advice, according to new research from the National Institute on Ageing at Ryerson University.

“The unfortunate truth is that advice within the financial service industry is often influenced by a potential conflict of interest,” said Dr. Bonnie-Jeanne MacDonald, the institute’s director of financial security research, at an industry conference on Wednesday.

“That’s because Canadians who take their CPP early will be less likely to touch their investments, and that will lead to higher trailing fees paid to the professionals who are managing those investments.”

MacDonald presented highlights from her research at FP Canada’s annual conference, which is being held virtually this year. She discussed her paper, which will be released next month, with Adam Reeder, a regional manager with RBC Financial Planning, and clinical neuropsychologist Dr. Moira Somers.

Delaying CPP and Quebec Pension Plan (QPP) payments is the surest way to secure lifelong income, MacDonald said, but very few Canadians are taking advantage. More than 95% of Canadians start taking their CPP/QPP benefits at 65 or earlier, and fewer than 1% wait until they’re 70.

MacDonald said the way the choice is communicated is a big part of the problem.

“In a way,” MacDonald said, “advisors are being compensated to tell Canadians to take their CPP as soon as possible.”

Government communications — which are repeated in the financial industry — describe the CPP/QPP benefit adjustment as “a very straightforward” 0.6% reduction in benefits for each month the benefit is taken before age 65, adding up to a 36% reduction when taken at age 60. On the other side, there’s a 0.7% increase for each month CPP/QPP is taken after 65, or a 42% increase for those who wait until 70, she said.

But the incentives are actually greater, MacDonald said, because the benefit is calculated based on the yearly maximum pensionable earnings, which moves with national wage growth. According to her research, the incentives are about 10% higher, and so are the penalties.

“If you had $1,000 a month at age 60 and you waited until you were age 61, that benefit would go up to over $1,100 a month,” she said. “If you wait to age 70, it’s going to move to over $2,200 per month in today’s dollars.”

Retirement is becoming increasingly fraught as many of the traditional supports are eroded. There are fewer workplace pension plans and historically low interest rates are reducing retirement income. Perhaps most importantly, MacDonald said, smaller families mean the elderly often receive less support than they used to from adult children.

Adding to these trends is the increase in life expectancy. Sixty-year-old Canadian men can expect to live, on average, another 26 years; women are expected to live another 29 years.

“This is a lot of time that people are going to be exposed to the risk and the worry of financial markets, inflation, expenses and also the anxiety of potentially running out of money,” MacDonald said.

Delaying CPP/QPP, she said, is like having a defined-benefit pension indexed to inflation. The value far exceeds what could be purchased in the marketplace as an annuity, for example.

“The message of this paper is very clear: most Canadians who can afford to defer their CPP and QPP benefits should do so,” she said.

Reeder said planners often use a break-even analysis to help guide CPP decisions, and asked MacDonald about that approach. The analysis calculates how long a client would have to live in order to make the decision to delay the benefit worthwhile.

MacDonald said the break-even framework basically encourages clients to gamble on the small risk of dying early, and makes delaying CPP appear to be the riskier option.

“The frameworks we present need to better capture long-term thinking, and break-even is pretty much the worst one when it comes to getting people to think long term,” she said.

Somers said advisors need to make the CPP and other decisions personal based on what they know about their clients. The Covid-19 pandemic has reminded many people of their mortality, and that can be used to drive discussions with clients, she said.

For clients intent on aging at home, for example, an advisor could ask how much extra care $1,000 per month would buy, Somers said.

Advisors should also flip the question of incentives versus penalties, MacDonald said: rather than using 65 as the default, discussions about CPP should start with payments at 70, and anything else should be framed as a penalty.

MacDonald’s research, which will be released on Dec. 8, follows a July report on the same topic from the Canadian Institute of Actuaries. That report found that “delaying CPP payments is clearly a financially advantageous strategy” for the majority of Canadians with sufficient savings to bridge the gap.