In March 2009, the Federal Government enabled regulations under the Pension Benefits Standards Act (1985), or PBSA, allowing pension plan sponsors to offer phased retirement as a means to retain mature workers. Phased retirement programs allow employees to receive a portion of their accrued retirement income while continuing to work for their current employer or a related employer. For example, an employee could receive 60% of their pension while reducing hours worked to 75% of full time, with a comparable reduction in compensation.
Based on the demographic trends in the G7 nations, the traditional working age population (e.g., age 20 to 55) is decreasing while the population above the traditional retirement age is increasing. This trend is attributable to increases in life expectancies and declines in worldwide birth rates. Phased retirement may provide employers with an option to manage the retirement patterns of employees who have the skills needed to deliver on the employer’s business strategy.
This article focuses on the legislation under the PBSA, which only covers federally regulated employees. Phased retirement is also permitted in Quebec, BC, Alberta, and Saskatchewan. In its 2009 Budget, the Ontario Government indicated that it would also enable phased retirement.
The PBSA sets out the following basic requirements for any phased retirement program:
• The employee must have a defined benefit entitlement; that is, phased retirement cannot be offered to an employee who only has a defined contribution entitlement;
• The employee must be at least 60 years old, or must be at least 55 years old and entitled to an unreduced pension under the plan; and
• The amount of the phased retirement income cannot exceed 60% of the pension payable had the employee fully retired.
A phased retirement program is most effective when it complements the employer’s overall workforce strategy. If an employer decides to implement phased retirement, it will need to determine the circumstances in which employees will be offered phased retirement and what types of offers will be made to the selected employees.
An employer is not obligated to offer phased retirement to every employee. The employer will generally only make offers to employees with competencies critical to the employer. In a 2007 AARP/Towers Perrin survey entitled “Profit from Experience”, four of the top five workforce challenges faced by Canadian employers included retaining talent, shortages of key talent, creating a pipeline of leaders and management, and attracting talent. Employees, for their part, are increasingly taking the view that retirement is no longer an event which occurs at a single point in time, but is rather a gradual transition from their career.
Phased retirement, if deployed appropriately, can support the employer’s and the employees’ respective needs and desires. That is, to the extent phased retirement can assist in the retention of key talent, the shortages may be reduced or deferred.
A phased retirement program is not limited to the simple extension of the current job. It can be coupled with a mentoring or succession management plan, where retained mature employees are deployed to help the employer strengthen its future leadership/management pipeline. Alternatively, the employer may have special projects or initiatives that require the skills of mature workers who are not otherwise occupied managing ongoing operations. Bringing back retirees and/or engaging employees near retirement may provide the leadership special projects require, while creating interesting new roles for mature employees.
Naturally, in selecting which employees will or will not be offered phased retirement, the employer must be cognizant of its obligations to operate in good faith and cannot contravene the discrimination provisions of Human Rights legislation. Similarly, before any offer can be made to an employee, the pension plan must be appropriately amended.