1)Financial needs
Research shows that people neglect to save properly for retirement until it’s too late. According to a recent University of Waterloo study, “Planning for Retirement: Are Canadians Saving Enough?”, two out of three Canadians expecting to retire in 2030 are not saving enough to maintain their current lifestyle.
An additional challenge involves DC plans, which are gaining more prominence as an increasing number of DB plans are being converted to DC plans or wound up altogether. Additionally, DC plans form the majority of the newly registered pension plans being created.
The sobering reality, though, is that DC plans face both longevity risk and investment risk. Gradual retirement offers a potential solution for the mature workers who need to cover financial shortfalls in their retirement savings.
2)Desire to work
Mature workers may choose to continue working simply because they value being employed and having the opportunity to use their skills. Plus, mature workers nowadays are healthier and more active, meaning they’re more likely to be interested in gradual retirement opportunities. Whether employees opt to work for the same employer or with a different employer, or start their own business, the key driver for gradual retirement isn’t always the financial incentive, but often the social benefits and welcome challenges that the workplace offers.
3)Labour or talent shortage
Many demographic analyses have come to the same conclusion: the incoming labour force is not large enough to replace the baby boomers that will soon be leaving the workforce. According to Statistics Canada, the dependency ratio is defined as the number of people under age 14 and over age 65 per 100 persons of working age(15 to 64). In 2005, Statistics Canada reported that there were 44 children and older citizens per 100 working-age persons. The projection for 2031 would be 61 per 100 and 69 per 100 in 2056.
For employers facing a labour or talent shortage, gradual retirement may provide the means to retain valuable employee equity, as well as encourage the transfer of knowledge and skills to more junior staff through extended opportunities for mentoring and training. With the recent phased retirement changes announced in the 2007 Federal Budget, the ability to simultaneously accrue pensionable service and withdraw pensions can be used to entice mature employees to take a gradual approach to retirement, alleviating some of the strain on the company’s workforce.
What Canadian Employers Need to Know
Recent legislative developments in Canada seem to support the modern “four-legged stool” model. From the elimination of mandatory retirement by several provinces to the 2007 Federal Budget’s proposal to incorporate phased retirement provisions, the gates to gradual retirement in Canada are opening up.
1)Elimination of mandatory retirement
First, the elimination of mandatory retirement allows employees to work past normal retirement age, instead of being forced into full retirement at the discretion of the employer. Mature workers can make their own decisions on whether to continue working, retire gradually or fully retire. Pension plans in Canada have always permitted plan members to accrue future service past the normal retirement age, and this also fits with the trend toward gradual retirement.
Currently, six provinces prohibit employers from forcing retirement at 65. Quebec and Manitoba were ahead of the game and banned mandatory retirement back in the 1980s. Alberta, Ontario, P.E.I. and Newfoundland recently jumped on the bandwagon, and more provinces are expected to join the list in the near future.
2)Phased retirement provisions in provincial pension legislation
Second, currently only two provinces— Quebec and Alberta—offer phased retirement programs to pension plan members. Phased retirement refers to an arrangement in which a plan member who is within 10 years of normal retirement age is working part-time and accruing pension benefits based on her actual earnings while simultaneously receiving partial pension payments from the same pension plan.
Under Quebec’s Supplemental Pension Plans Act, plan sponsors can offer phased retirement as an option to its retirementeligible plan members. Once an agreement is signed with the employer, the interested Quebec plan member receives a partial pension benefit based on prescribed formulae and conditions. At the member’s full retirement or age 71, whichever occurs first, the ultimate lifetime pension is reduced by the amount already received during phased retirement.
Quebec’s phased retirement program makes sense as part of the new model for retirement income. However, it’s hindered by certain Income Tax Act(ITA)restrictions. For instance, it’s not permissible to gradually decrease one’s part-time hours on the job while gradually increasing the pension payout from the company pension plan. The Quebec program only pays out annual lump sum pension amounts to members who sign up for the program.
The phased retirement program under Alberta’s Employment Pension Plans Act is very similar to Quebec’s. Manitoba is following suit, as it’s introduced phased retirement provisions in Bill 10. Ontario isn’t there yet, but has made some strides in this direction—in particular, the formation of the Ontario Expert Commission on Pensions, whose mandate is to review Ontario’s pension system. Examining “the impact of demographics and the changing nature of the workforce on the provision of employment pensions” is a key component of the committee’s agenda.
3)2007 Federal Budget’s phased retirement proposal
Finally, the 2007 Federal Budget proposed two pension plan-related changes consistent with the gradual retirement theme.
One, the maximum age limit at which members must start withdrawing benefits from registered retirement savings plans increased to 71 from 69, effective Jan. 1, 2007(you may recall that the maximum age was decreased from 71 to 69 in 1996). Certain transitional rules for 2007 and 2008 were also presented to accommodate those Canadians caught in the shuffle.
And two, the budget proposed the removal (under certain conditions)of the prohibition under ITA Reg 8503(b), effective Jan. 1, 2008. This provision currently prohibits simultaneous accrual of pension service and pension withdrawal. The chart on page 15 provides some details on how this proposal affects pension payments for both DB and DC plans.
One key difference between Quebec’s phased retirement program and the ITA program is that the ITA program doesn’t require part-time status(that is, a corresponding reduction in salary or work hours). Also, the restriction that bridge pensions can only be paid when the lifetime basic pension is paid has been removed. This means that regardless of whether the mature member is gradually retiring or remains fully employed, the member can continue accruing pensions in the pension plan while receiving the basic pension plus bridge or just the bridge pension.
Obviously, Quebec, Manitoba and Alberta will need to revisit their phased retirement provisions to ensure that they are compatible with the new ITA rules. The other provinces may need to amend their provincial pension legislation before plan sponsors can apply the new ITA phased retirement provisions.
What Should Employers Do?
The focus for companies in the 21st century should be on strategic workforce planning, with a mission to create a working environment that accommodates a multi-generational workforce. Human resources training and recruitment and retention policies should be adapted to address mature workers. Gradual retirement must be a consideration; however, employers must keep in mind the potential financial impact of gradual retirement, both positively and negatively.
Employers need to keep current on developments in the Canadian pension landscape and review and revise their human resources policies and programs as things change to ensure that they are meeting new legislative and employee needs. A proactive approach now will save companies time, money and frustration over the long term and help ensure that they will thrive in the brave new world of retirement in Canada.
Deborah McMillan is a consulting actuary with ACS /Buck Consultants in Toronto. deborah.mcmillan@buckconsultants.com
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