When an employer elects to offer phased retirement to a specific employee, there are also prescribed disclosures to ensure that the employee and his/her spouse, where applicable, understand the arrangement. In particular, they must be advised the amount of the phased retirement income to be received and the formula that will be used to recalculate the pension at the end of the phased retirement period. The employer must also provide details about how contributions and service credits will be determined during the phased retirement period, recognizing that an employee may not necessarily be continuing in a full-time role.
Once the governance issues have been addressed, employers are free to design the package offered to each employee to meet the needs of both the employee and organization. Typically, the employer will want to strike a balance between any incremental cost and the anticipated benefits for the employee to continue working. The ability to tailor the offer to each situation is a key element of the phased retirement legislation.
Under the PBSA there is no requirement for the employee to reduce work time and/or salary. Should the employer have a key employee that is genuinely considering retirement, the employer could offer an attractive arrangement whereby the employee could actually receive more than 100% of previous salary and still accrue pension benefits to be paid at the ultimate retirement date.
From a cost management perspective, the ability to defer retirements for pension plans with significant early retirement subsidies can actually reduce pension costs. This presumes, of course, that the overall compensation arrangements with the employee are no more generous than would be offered to another employee deployed to perform the desired role.
Prior to the changes in the PBSA, employers were likely to experience the phenomenon whereby employees who were eligible for an unreduced pension choose to retire and then “double-dip” by securing employment elsewhere at a comparable or slightly lower level of compensation. Employers now have creative license to find ways to retain these employees, which may require new programs to engage and encourage critical employees to remain with the organization.
Engagement efforts will be especially important in cases where the current employer provides post-retirement healthcare or other benefits—commonly vested for retirement eligible employees—since there may be less incentive on the part of the employee to reject a potential new employer who does not provide such benefits.
Phased retirement can also open up other employer challenges. For example, there may be some employees who view the phased retirement program as an entitlement that should be made available to all. In some cases, an employee may communicate to the employer their intentions to retire in the near future with the primary objective being to solicit a generous phased-retirement package (and increase overall compensation). To ensure that any cost increases associated with phased retirement are appropriately managed and compared against the benefits, employers will need to adopt a careful review process before phased retirement offers are made.
Another challenge for employers may occur where key talent is unionized. Many unionized pension plans require union approval before amendments can be made. When the employer proposes to introduce phased retirement, the union may demand certain conditions on the packages being offered to candidates. In the extreme, the union may demand that phased retirement be offered to all employees who meet the specified conditions. Without the flexibility to tactically select the employees to whom packages will be offered, such a scenario would invariably increase the employer’s costs.
For the most part, however, phased retirement can provide employers with a tool to manage their workforce, while meeting the desire of many employees to ease into retirement. By carefully assessing the details of the approach, employers can ensure that they achieve an optimal workforce outcome at a reasonable cost.
Philip Morse is a principal in Towers Perrin’s Toronto office.
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