How is phased retirement impacting employers?

And a report from Fidelity Investments, The shift to retirement income—beyond the headlines, indicates 66% of pre-retirees expect to work in retirement, with 51% saying they would work as an employee and 28% say they may start a new business.

“When retirement was first out there as something people could do, life expectancies were much, much shorter,” explains Peter Drake, vice-president, retirement and economic research, with Fidelity Investments Canada ULC. “The idea was you would stop working and you’d have two or three years before you died. Now, you can have a retirement as long as your working life.”

The era of people working for the same company for 30 years and then retiring with a DB pension plan over.  As lifespans increase and DC plans take over, changes to retirement are needed. “The biggest risk Canadians have is outliving their savings. Fifty years ago the biggest risk Canadians had was dying too young,” says Tom Reid, senior vice-president, group retirement services with Sun Life Financial.

The need

Various industry studies in recent years have found that a significant number of employees in their 50s are not meeting their retirement goals. In a recent survey from the Canadian Payroll Association, 46% of respondents said they put 5% or less of their pay into retirement savings. Financial planning experts generally recommend a retirement savings rate of 10% of net pay.

When asked how close they are to their retirement goal, 73% of respondents said they have saved less than their goal. Of those 50 and older, 45% report that they are less than a quarter of the way there.
Drake explains, “One of the hardest parts is to envision what your retirement is going to be. If you know what you want to do in retirement, than it will be easier for you to figure out how to pay for it.” He adds, “Working in retirement isn’t a retirement plan.”

Drake says a low level of employee understanding around saving is to partly to blame for the shift to phased retirement. He says that while plan sponsors have been doing more to help educate and engage employees, there is still work to be done.

“There’s more talk of retirement and more awareness of financial issues, but I don’t think there’s been nearly as big a change in financial literacy,” he says.

Of course, this is where auto-enrollment and auto-escalation can really help. Reid feels there is a real need for these aspects to be worked into plans.

The want

In addition to a mounting financial need to remain in the workforce after age 65, there’s increasing evidence to suggest people will remain in the workforce out of desire. Only 30% of respondents to the Sun Life survey said they expect to be fully retired by the age of 66, while 55% expect to still be working until age 71. Of employees who expect to still be working, 39% said it would be because they want to.

The Fidelity report found that besides financial reasons, staying mentally/physically active and to help pass time/keep busy were the two main reasons for people opting to phase in their retirement.

Impact on employers

According to Reid, a growing number of employers are realizing that employees’ desire to keep working into their retirement years can benefit their organization. “More and more, we are in a knowledge-based economy, and when someone retires, that’s a lot of institutional knowledge that walks out the door. In an effort to retain that knowledge, people are being progressive. There is also a need for employers to retain talent longer.”

Carol Craig, director, HR, benefits and pensions, with Telus Communications, says her organization views phased retirement as a positive trend.

Telus has been supporting phased retirement informally for five years, and has had a formal phased retirement program for the past two years. The program enables team members who wish to start collecting their pension benefit to do so while they continue to work reduced hours.

“It started both because team members wanted to retire but weren’t really ready to stop working and because Telus needed to keep experienced, knowledgeable people,” explains Craig.

Putting such a program in place has allowed the company to retain highly skilled talent. “My team has personally benefited from this program,” she says. “One of our members retired five years ago and has been working part-time since. She is an extremely knowledgeable, valuable member of the team.”

The University of Waterloo has also implemented a policy allowing staff to reduce their workload and phase into retirement. “The intent is for employees to gradually move in to retirement and for departments to save some costs in economically difficult times and still maintain business,” explains Alfrieda Swainston, manager, salary administration, human resources, with the University of Waterloo.

“It is usually a win-win circumstance, but there are instances where a department may not be able to support such an arrangement due to volume of business or the nature of the role.”

Reid says that, for this reason, phased retirement programs are currently more common in larger organizations with more resources. But, he expects that within five to 10 years, phased retirement policies should be commonplace in most companies.

A potential downside to having an older workforce is increased healthcare costs. But, says Reid, the trade-off is worth that financial risk. “Employers are balancing incremental healthcare costs with the retention of institutional knowledge. They are reducing the challenge of finding new talent to replace. Plan sponsors are doing the arithmetic and finding that it’s well worth retaining people past the normal retirement age.”

No matter what people envision for their retirement or when they decide to move away from full-time work, one thing is certain, according to Reid: “[For pre-retirees and future generations] the retirement of their parents or their grandparents won’t be their experience.”