A couple of years ago, I bought a sporty new convertible. When I first parked it in my driveway my neighbours came over to admire my shiny new toy. Within a few months, it appeared that the guy next door had been stricken with car envy, as he parked a newly acquired flashy convertible in his own driveway. Fortunately for me (and my new car), my neighbour’s response to car envy was quite different from a pension envy response, or I might have found my tires and ragtop slashed instead.
Instead of advocating that public sector pensions be slashed as an emotional response to pension envy, small and medium-sized private sector businesses might more productively seek ways to achieve pension fairness by building their own retirement programs. Contrary to propaganda otherwise, this can actually be quite affordably accomplished with a little planning and patience.
Pension envy can be slaked with a pension program of modest value. My convertible was new, but my neighbour opted for an older model that was less expensive to acquire, but with (perhaps) a little more cachet (a used BMW M3 versus a new Ford Mustang). Similarly, most employees will happily settle for a DC pension plan with 10% combined contributions as a reasonable proxy for a DB plan where the cash value is less obvious. Ten percent is admittedly an arbitrary figure, but it still stands the test of time as a financial planning benchmark for a reasonable level of retirement income.
To get to 10%, it is also reasonable to assume shared costs between employee and employer. A dollar-for-dollar match is generally considered to be an appropriate level in the Canadian context (in the U.S., the most common employer match is 50 cents to the employee dollar). So, pension envy can be addressed with a modest employer contribution level of 5% of pay.
Of course, few employers can go from zero to 5% contributions in 60 seconds. But why not 60 months? If employer contributions ramp up at a level of an additional 1% per year, and if you started at 1% in the first year, you would reach 6% after five years. By establishing a dialogue with employees on the employer’s commitment to pensions and the willingness to make contributions, it is even quite likely that the employer might find the cash by allocating a portion of cost of living salary increases to meet the employer contribution.
PRPPs, accompanied by auto-enrollment and auto-escalation features and the touted low costs, could make such a strategy very accessible to both employers, regardless of size, and employees. Furthermore, once enrolled in a program, employees will gain access to retirement planning tools that will help them to better understand the advantages of saving and investing for retirement. Employees might then choose to make additional contributions even when they do not attract an employer match.
Retirement income security is important for all Canadians, and employers have a central role to play. The most efficient and painless way of funding retirement is by way of payroll deductions at source, which is wholly in the control of the employer. Pension fairness can be achieved by embracing such a role in the spirit of “keeping up with the Joneses” instead of avoiding it and complaining about the enviable pensions workers in the public sector (as well as many employed by large organizations in the private sector) have built together with their employers.