For generations, the concept of retirement centred around a one-time event: you worked to age 65, then your employer sent you off with a gold watch and your DB pension. But just as DB pension plans have begun to fall out of favour in recent years, so, too, has the concept of retirement changed.
“It used to be that people thought, ‘I’ll never last to 65, and, if I do, I’ll be almost dead,’” says Serge Charbonneau, a partner with Morneau Shepell. “But people don’t say that anymore.”
In 1997, Quebec became the first jurisdiction in Canada to allow for a phased transition to retirement, with the passage of amendments to its Supplemental Pension Plans Act. The changes allowed employees to reduce their working hours and begin to draw a percentage of accrued DB pension benefits to supplement their income, while still contributing to their plan. When the employee fully retired, his or her pension would be reduced to account for the early payments.
Charbonneau, then vice-president of pension consulting with Aon Corp., said that the changes came during a period where lengthening lifespans and volatile markets were changing the way people thought about retirement.
“A lot of people were interested in the concept and said, ‘Wow, this is great, and it suits the needs of the marketplace,’” remembers Charbonneau of the amendments. “But once you started looking at the nitty-gritty, you said, ‘Wait, it’s not as good as it could be.’ We were all stuck with the Income Tax Act.”
Indeed, the federal act contained provisions that prevented pension plan members from drawing monthly pension benefits while still working and contributing to their plan. To get around this, the Quebec legislation (and that of Alberta, which implemented similar changes in 2000) offered DB plan members who opted for phased retirement their pension payments as an annual lump sum.
Charbonneau says this stumbling block led to limited uptake of the phased retirement option, since the annual payments didn’t work for individuals living on monthly budgets.
But many in the industry cite Quebec’s initial phased retirement experiment as a catalyst for other changes that have taken place around retirement in Canada. The portion of the Income Tax Act was finally changed in 2007. And recent changes to the Canada Pension Plan and Old Age Security account for Canadians’ increasing lifespans and the need—or the desire—to work longer.
“It’s a good thing to stop the mentality that retirement is all or nothing, and to have a transition period. You don’t go from black to white in a single step; you go through gradual shades of grey.”
Charbonneau says there is still work to be done around retirement. For one, he explains, governments need to better align the different rules to make pensions portable across Canada.
“If they could afford it, everybody would choose to live a life of leisure instead of continuing to work. If you think you might only have a few years to live, you can’t wait to stop working and enjoy life. But when you realize that you’ve got a lot more life down the road, you can postpone those plans.”