A major roadblock for phased retirement in the past was the restriction under the Income Tax Act (ITA) that prohibited members in a defined benefit (DB) plan from continuing to accrue benefits while receiving a pension from the same plan. In a time of talent shortages, this restriction created an incentive for people who had already maxed out their pension contributions to start drawing that pension and work elsewhere—often earning another pension.
Sparked by concerns for how a retiring baby boomer generation would affect the country’s labour resources, as well as the cost impact to public social security programs, the federal government amended the ITA (effective Jan. 1, 2008). Now, employees can receive up to 60% of their full pensions and continue to accrue benefits under the same plan while working part-time. Most respondents (83%) said they would allow their employees to make use of phased retirement, to entice them to continue working and ease the pressure of labour shortfalls.
However, current pension legislation in several of the provinces conflicts with the new rules, preventing national employers from fully benefiting from the ITA’s phased retirement pension allowances. All employers should review the existing provisions of their pension plans to see how phased retirement arrangements could be accommodated.
Alternative Structures
Almost half of the survey respondents expressed an interest in adopting alternative pension plan structures. They would like to achieve a risk-sharing intermediate between the current DB and defined contribution (DC) plans in which the contribution would be fixed, but the actual benefit delivered would vary based on the funded position of the plan.
Additionally, conversions from DB to DC plans appear to be slowing. Almost three-quarters of respondents do not expect to convert from a DB to a DC plan. The main reason, given by 60% of the respondents, is that they have a DB philosophy: they believe it’s more appropriate for them, rather than their employees, to take on the investment and other risks related to providing a secure retirement income. Nearly 30% believe that a DB plan is necessary to attract and retain employees, while 40% noted that a DC plan would be inconsistent with the programs offered by other employers in their industry.
Compliance and Education
While DB pension plans have existed in their present form for more than 40 years (more than 20 years for DC plans), the survey results show there is still room for improvement when it comes to plan governance. Alarmingly, one in five DC plan sponsors says they have not been active in governance and either do not comply with the CAP Guidelines or have not checked to see if they do. A further 16.7% said they have allocated governance roles and responsibilities for their DC retirement plans (which are compliant with the CAP Guidelines), but they have no documented process for monitoring these responsibilities.
The survey also shows an increased interest by DC plan sponsors to provide retirement planning assistance to members. Sixty-three percent of respondents provide some retirement or financial planning education to their employees, and 45% of those that provide such education introduced it within the past three years. Thirty-eight percent of organizations without education programs intend to implement them within the same time frame.
The message to employers is clear. DC plan sponsors can play an important role in ensuring that their employees have the tools they need to make a successful transition from active employment to retirement.
Barry Gros is a vice-president with Aon Consulting. barry.gros@aon.ca
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