The March 2007 federal budget included changes to allow Canadians to build their pension benefits until age 71 (increased from age 69), to split pension income and to permit phased retirement.
There has also been a push to remove mandatory retirement provisions in the Atlantic provinces. In Nova Scotia, mandatory retirement will be removed in July 2009. Employers in that province will no longer be able to force an employee to retire on the basis of age (except where age can be justified as a bona fide occupational requirement). In the other Atlantic provinces, employers can force an employee to retire only if it is a plan requirement that applies to employees across the board.
Mandatory Flexibility
For some employers, this more flexible view of retirement may offer opportunities, helping with labour shortages and allowing people to leave when they want—with their dignity intact. For others, the change may be a challenge, leaving them with older, more expensive (and possibly less productive) individuals on their payroll.
Light Bright By Brooke Smith N.B.Power Holding Corp. is a bright light in Atlantic Canada. As one of Canada’s Top 100 Employers in 2008, the 2,500-employee electric utility has had a 1% turnover rate over the last few years (as low as 0.4% in 2004). However, Maurice Poirier, manager of pension and benefits with N.B. Power in Fredericton, isn’t naive when it comes to attracting and retaining employees. “We can’t offer the same pay as some of the larger corporations in Toronto, let’s say,” says Poirier. “Our market is mostly people who are from the Atlantic provinces or who want to come here for the lifestyle. It’s not necessarily for more money.” Working in Style One way N.B. Power supports this lifestyle is flexible working hours. Although it’s challenging to apply this perk to N.B. Power’s plants and distribution/customer service areas, the company does its best to accommodate as many employees as possible. “For anyone who works in an office environment, we promote flexibility and allow them to work from home or to work altered hours,” says Poirier. “That’s not anything different than you would see in Ontario in some of the bigger centres, but in Atlantic Canada, it seems to be something that people are really attracted to.” Similarly, the voluntary leave program, which has been running for more than 10 years, sees approximately 100 employees participate each year. To acquire two months off (usually July and August), an employee works the rest of the year at 80% of his or her salary, without this having an impact on pension and benefits. “It’s like a prepaid leave,” says Poirier. “A lot of people seem to be interested in having the summers off, [but] we’ve seen some people who have taken this leave in order to spend part of their winters away from our cold, snowy winters.” Easing daily routines adds to the lifestyle, too. For employees with young families, for instance, there’s an on-site daycare at the head office in Fredericton. “Even if an employee’s child is not in the N.B. Power daycare, there are spots reserved [in case of an emergency] for N.B. Power employees.” Retiring in Style And while N.B. Power’s employees and retirees are already enjoying this lifestyle, so will future retirees. Though the company can’t offer higher salaries, it can offer retirement money. As a crown corporation, N.B. Power falls under the New Brunswick Public Service Superannuation Act and offers a defined benefit (DB ) plan, which, Poirier says, is popular with prospective hires and employees. “Employees seem to be quite happy with their DB plan, especially when the market drops and they talk to some of their friends [who] have a defined contribution plan and the decisions that they have to make toward their retirement or, in some cases, coming back into the workforce.” Nearing retirement himself, Poirier is thankful for his DB plan. “I really appreciate the fact that when I retire in a few years, I’ll have a defined benefit for life.” But the benefits don’t stop at pensions. Retirees can participate in a health and dental program, administered by Medavie Blue Cross. N.B. Power also offers its retirees life and accidental death and dismemberment insurance at the active employee rate and offers a “paid-up life insurance policy.” Time off, daycare, DB plan, flex arrangements: it’s no wonder the average years of service at N.B. Power is 16.5. Despite the accolades, however, Poirier is realistic. In the next 10 years, he says, about 50% of the company’s employee base will be ready to retire. This staggering percentage can only warrant some kind of phasedin retirement down the road. However, it will have to wait on the province. “We can’t introduce a phased retirement program without the province doing it. It’s their pension plan.” Losing younger workers to the west, technicians to the U.S. (about a half-dozen left a couple of years ago) and plant operators to other companies is mild in terms of labour shortage, according to Poirier. “[Recruiting] hasn’t really been a challenge for us now,” he says, “but to attract skilled employees when they’re just not going to be there will become an issue.” The lights will be on, but who’s going to be there to shut them off. |
Faced with an impending shortage of skilled tradespeople, employers in Atlantic Canada may take the opportunity to encourage older people to continue working by offering more flexible retirement plans. On the other hand, employers may find the potential employment cost prohibitive.
The removal of mandatory retirement likely won’t have a large financial impact on defined benefit (DB) pension plans. The cost of the additional accrued pension will be offset by the fact that the pension will start later and therefore will likely be paid over a shorter period of time.
The impact of eliminating mandatory retirement on defined contribution (DC) plans may be a different story. This is because the very nature of DC plans already encourages employees to continue working. Quite simply, the longer members delay accessing their DC retirement accounts, the more the accounts will be able to provide pension in the retirement years. Accordingly, the removal of mandatory retirement for sponsors with DC plans will make it even more challenging to force employees to retire and may encourage employers to promote flexible retirement alternatives. Given the trend we are seeing toward DC plans in the private sector, it will be interesting to keep an eye on this issue in the years to come.
The changing nature of mandatory retirement and the opportunity to design increasingly flexible retirement arrangements— such as phased retirement—fits nicely with the basic message that Atlantic Canada is “a great place to work and live.” The challenge, however, is for employers to design an effective and sustainable retirement arrangement that meets both employee and employer objectives.
The Balancing Act
Providing meaningful retirement plans starts with being able to afford them. DB pension plans have provided significant cost challenges to sponsors in Atlantic Canada, for the same reasons as elsewhere. These challenges include historically low interest rates, volatile investment markets and members living longer, together with the trend toward market-based cost measurement under solvency funding and accounting measurement standards.
Although DB plans have had their costmanagement challenges, they remain the pension vehicle of choice for public sector entities in the Atlantic provinces. Provincial governments are not required to fund pensions on a minimum solvency basis or report pension costs on a market-based accounting standard.
In addition, certain other public or quasi-public sector employers have successfully argued that they should not be subject to solvency/windup funding. For example, New Brunswick’s universities and municipalities have recently been provided conditional relief from funding solvency deficits. Municipal pension plans in Nova Scotia now only have to fund to an 85% solvency position. And, universities in Atlantic Canada have received various forms of temporary solvency relief, and discussions continue around more permanent solutions to the challenges applicable to universities.
While public sector entities in Atlantic Canada have had some protection against market-based solvency pension funding, there is a lurking risk. If accounting standards for provincial and municipal public sector plans were ever required to meet the same measurement and reporting standards as private sector plans, the result would be significantly increased costs and volatility on government balance sheets. This is because the discount rate used to report pension obligations would be changed to a market-based interest rate from the long-term rate of return assumption currently used for funding and reporting. The result: more pressure on public sector DB plans.
For private sector employers, the story is different. Unpredictable DB pension costs and a lack of funding relief have frustrated many private sector organizations in recent years, leading them to take a closer look at their DB plans. In a number of cases, the result has been conversion to a DC plan.
Plan sponsors are not the only ones who are feeling the effects of the financial risk from the volatility and increasing costs of DB plans. Employees are also affected by cost-management challenges. For example, employees have been asked to contribute more, and increased employer costs have put pressure on wages and other employee benefits. Also, employers have looked at restructuring future benefits, which could result in smaller pensions for their employees going forward.
Like the rest of Canada, there is pressure on legislators in Atlantic Canada to reconsider pension regulation. The challenge is to provide a sensible, flexible and appropriate framework for pension plans to operate and evolve to meet the requirements of Atlantic Canadian employees and employers. A review of the very nature of allowable “pension deals,” together with appropriate mandated minimum funding requirements, is vital for DB plans to thrive in the future on a healthy and sustainable basis. On a positive note, we are already seeing some progress in terms of recognizing the unique nature of the pension deal for the multiemployer sector.
Individuals, employers and legislators need to embrace the challenges and opportunities that come with change. These challenges include changing work environments, revisiting compensation structures and supporting workers planning for a new style of retirement.
Derek Gerard is a principal and consulting actuary, and Jeff Turnbull is a consulting actuary with Eckler Ltd. in Halifax. dgerard@eckler.ca; jturnbull@eckler.ca
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