In Western Canada—particularly in Alberta— the battle for talent is heating up. Alberta’s hot economy is not expected to cool for at least another decade, as oil sands projects and plans for increased production escalate. The demand for workers will intensify, particularly for experienced, skilled employees.
British Columbia is preparing for the 2010 Winter Olympics, and a massive surge in construction is underway in Vancouver. Although B.C. is trying hard to hang on to local employees, many are leaving for higher wages in Alberta. It’s even been reported that employers are attempting to poach striking Vancouver city workers looking to make ends meet.
Meanwhile, Saskatchewan—one of only two areas of the country to experience a decline in population since the last census in 2001—is losing a considerable number of employees to its neighbour to the West, as are the Atlantic provinces. With its own natural resource deposits, Saskatchewan could soon find itself with significant labour shortages, and even Ontario’s labour force is not immune to the lure of the West.
Strong labour demand throughout the Western provinces combined with the unique set of circumstances in Alberta—a booming economy, a diverse workforce and a trend toward early retirement—means that employers are increasingly willing to push the envelope to find innovative solutions to attract and retain employees. It’s no longer enough to just throw more money at workers—and in many cases, employers can’t afford to do so—so Western organizations are looking at economical yet effective ways to appeal to employees. There’s also a move toward new ways of thinking about retirement and communicating retirement savings.
Flexible rewards
One novel solution is the concept of flexible rewards—a strategy that has already been adopted by some employers in the U.K. and Australia. Flexible rewards is essentially an extension of the flexible benefits concept: the organization restructures compensation so that base pay and the value of benefits and perquisites are lumped together and communicated as a total compensation amount. While there is generally a certain amount of compensation set aside to cover core benefits, including statutory benefits and employerrequired coverage, the rest of an individual’s “flex fund” can be allocated toward a broad menu of benefits, including retirement savings. The flexible rewards approach is the ultimate form of flexible compensation, as it allows employees to customize virtually every aspect of their compensation package.
One advantage of a flexible rewards approach is that it helps shift an employee’s mentality from one of entitlement to one where the total overall value of compensation is acknowledged and appreciated. In addition, enabling employees to customize their compensation often results in cost containment and increased employee satisfaction. At The Royal Bank of Scotland, one of the early adopters of this approach, survey data indicates that those who actively participate in the flexible rewards program are 18% more engaged than those who do not.
What does the retirement savings aspect of a flexible rewards approach look like? Much depends on whether the employer offers a defined benefit(DB)pension plan or a defined contribution(DC)arrangement. With a DB plan, there are legal and administrative hurdles to providing full pension flexibility. Here are a few examples from the 2007 Canadian Handbook of Flexible Benefits.
• Due to their nature and structure, DB plans typically provide benefits based on an employee’s final average earnings and years of service at retirement. This makes it difficult to set an accurate “price tag” on increments of pension far in advance of the employee’s actual retirement date or without knowledge of the intended retirement date.
• Volatility in stock markets and decreasing bond yields have generally resulted in large increases in pension costs, making it more risky to set fixed prices.
• The complexity of pension plans and the legislation surrounding them mean that many employers just aren’t interested in making their plans any more complicated than they already are.
The bottom line is that a DB plan is more likely to be structured as a core benefit than as part of a flexible rewards program. A DC plan, however—such as a registered pension plan, RRSP or DPSP—lends itself more easily to a flexible rewards approach. With a DC plan, an employer could make a certain portion of the required contribution part of the core benefit and allow employees to elect to use the rest as credits in the flexible rewards program. Currently, it’s more convenient to provide such benefits outside of a registered DC plan(e.g., via an RRSP).
Despite the current recruitment and retention challenges and the real possibility that they will persist, Canadian organizations have been slow to adopt a flexible rewards approach. However, the circumstances in the West—and particularly in Alberta—are causing some Western employers to seriously consider it. Before a flexible rewards program with retirement savings options can be implemented successfully, however, the employer must come to terms with allowing employees to make their own choices regardless of what impact this may have on their retirement savings.
Phased retirement
Another less drastic option that still offers increased flexibility to both employees and employers is phased retirement. “Phased retirement” usually refers to a gradually reduced work schedule at reduced pay. This option allows an employee to transition more smoothly from full-time employment to retirement while helping the employer to maximize the experience and knowledge of senior staff.
Ideally, the reduction in the employee’s income would be offset by the receipt of a partial pension or other retirement benefits. However, under the current Income Tax Regulations, an employee is prohibited from receiving DB pension benefits while continuing to accrue pension credits under the same plan or any other DB plan sponsored by the same employer. The income tax regime also requires that benefits from a pension plan be paid in equal periodic amounts. Note, however, that these restrictions do not apply to DC plans: an employee may receive a DB pension while continuing to accrue under her employer’s DC arrangement. The 2007 Federal Budget proposed changes to the Income Tax Regulations that would better accommodate phased retirement arrangements. With a projected effective date of Jan. 1, 2008, the new provisions would allow employers to offer eligible employees the opportunity to receive up to 60% of their DB benefit while continuing to accrue additional pension benefits in the same plan. To be eligible, an employee must be at least 55 years of age and entitled to an unreduced pension(i.e., no early retirement reduction). These proposed changes offer another solution to employers seeking new ways to encourage older workers to remain in the workforce.
The various Canadian provinces will need to consider whether or not to amend their pension standards legislation to accommodate the proposed changes. Alberta and Quebec are the only provinces that have already adopted provisions to accommodate some form of phased retirement for DB plans, and these provisions were intended to work within the current income tax regime, which limits their flexibility. For instance, in Alberta, an eligible employee can receive an annual lump sum payment from the DB pension plan(subject to a maximum amount set out in the legislation)while continuing to accrue in the same plan. However, many employees don’t find the lump sum payment arrangement very practical.
As in other parts of Canada, interest in phased retirement in the West is high—even if it’s not possible for retirement benefits to make up the shortfall in income. According to the results of Hewitt Associates’ Attracting and Retaining the New Workforce 2006 survey, 26% of employers in Alberta offered phased retirement arrangements last year, and that number is expected to grow to 48% by 2009. Phased retirement is expected to increase in popularity even more dramatically in other Western provinces: from 27% to 57% in B.C. and from 18% to 53% in Manitoba and Saskatchewan.
Retirement education, counselling and communication
With the expected increase in innovative and more complex retirement solutions comes a greater need to provide adequate retirement education and counselling. According to the Hewitt survey, while 55% of employers in Alberta offered retirement education or counselling last year, the figure will likely jump to 74% by 2009, the largest percentage increase in the country. More choice means more decisions for employees, which in turn requires improved communication, education and decision-making tools. Ensuring that employees understand their plans and the need to set aside enough funds for an adequate retirement income is the first challenge. But convincing them of the value of their retirement savings benefits takes communication requirements to another level. In a competitive labour market, if workers don’t appreciate what they’re getting, they may move to other employers on the basis of salary alone, even though the value of the total compensation package may be lower. To attract and retain top talent in a company’s workforce, it’s important for employees and job candidates to be able to easily compare what competing employers are offering.
The increasing prevalence of DC plans as a retirement vehicle for the private sector is another strong motivator for increasing the focus on retirement education and counselling. Not only is it an important tool in promoting the value of pension benefits, it’s also a necessity when employers have retirement savings plans that give investment choices to employees.
Many Western employers—particularly those in the highly competitive oil and gas industry—face additional communication challenges, since workers are located in remote areas far from the company’s head office. In these situations, print communication remains the primary communication strategy, sometimes coupled with on-site visits from HR staff. E-learning and online modelling tools have become more prevalent in recent years. Some leading-edge employers are also exploring wireless communication tools, such as BlackBerrys, audio podcasts and blogs, to better reach and encourage dialogue in a mobile workforce.
Maintaining a strong communication strategy that includes continuous communication with employees is the key to ensuring that employees understand the value of their retirement arrangements. Employers may want to consider segmented communication to target various groups of employees (e.g., by age or proximity to retirement). And when an employer introduces a flexible rewards plan, a thorough explanation of the flex fund is critical. In the case of The Royal Bank of Scotland, communication was phased in to build awareness of the plan before it was implemented.
Planning for the future
The attraction and retention challenge in Western Canada is encouraging employers to strive for greater awareness and appreciation of the retirement plans they offer. While organizations must be guided by the policies and practices that will attract, retain and engage their own current and future workforce, given the increasing shortage of labour, it is in the best interests of all employers to keep a close eye on the Western trends currently being set.
Master Builder What PCL Constructors Inc. did to compete in a flourishing Western economy. PCL Constructors Inc.(PCL)has been Canada’s largest contractor for more than 25 years. But the $5-billion construction giant grew from humbler beginnings. In 1906, company founder Ernest E. Poole left Prince Edward Island and headed west in search of work. Before the year closed, he had established a contracting business, building town halls and the like in Saskatchewan and Manitoba. Through his work ethic and craftsmanship, Poole’s business swelled. In 1948, when he sold the business to his sons, he also provided them with a list of contracting guidelines. These were known as Poole’s Rules, which PCL still follows today, particularly the first: “Employ highest-grade people attainable.” But hiring and retaining the “highest grade” in the current flourishing economy is challenging. PCL then had to look to its foundation: its employees. In PCL ’s January 2006 employee survey, workers wrote their concerns about the company’s benefits plan: it was expensive (a fifty-fifty premium), and they wanted more coverage and a direct-pay system. “In the last survey, the satisfaction with the benefits plan was not as high as we would like it to be,” says Dennis Wiens, director of HR services at PCL ’s head office in Edmonton. “It certainly wasn’t in the tank, but it wasn’t great.” Not only did employees voice their opinions, but prospective employees did, too. “We were hearing, ‘Your benefits plan is okay, but I didn’t pay for this at my previous employer’ or ‘I’ve been interviewing with other companies and their plan appears better,’” says Wiens. Although anecdotal, those comments, along with those from the employee survey, were enough to get executives rapping at HR’s door. After extensive research into the industry, studying competitors and the hiring pool, HR realized the obvious. “There were indicators coming to us both internally and externally suggesting that our plan was lacking in some areas.” If you build it… In May 2006, PCL reconstructed its benefits plan, dropping the premium for employees from 50% to 25%, increasing coverage on both dental (preventative costs)and drugs from 80% to 100% and adopting a direct-pay approach. It also introduced a visioncare plan, which it didn’t have previously, granting employees $250 every two years. These changes, Wiens maintains, drove PCL ’s plan “probably into at least the top quartile of competitive plans within the construction industry.” And, more importantly, helped PCL edge closer to the oil and gas industry in terms of compensation. “We have a large industrial construction component and do considerable work within that industry. Many of our employees and prospective employees often come from that industry so we needed to get closer to its standards.” PCL did get closer. In fact, it is No. 16 on Canada’s 30 Best Pension and Benefits Plans. It’s been on Report on Business’s Best Employers in Canada list every year but one since the list’s inception in 2000. “And, the average length of service is about nine years,” says Wiens. However, that nine-year tenure has been “diluted” lately because of the flourishing economy and increased newcomers. “The organization has also experienced some increase in turnover during the last couple of years as our industry has become so busy.” As new projects emerge, PCL will continue to recruit. According to its workforce planning, the company will likely need another 15% growth in salaried staff over the next one to two years. “Our big numbers are driven just by volumes of work. It’s still a very buoyant economy here in Alberta. There’s a lot of work happening.” Indeed. PCL ’s latest acquisitions include the expansion of Edmonton’s Southgate mall and the extension of the South Light-Rail Transit. Further west, PCL will construct a new shopping centre in Victoria. Poole would certainly approve. —Brooke Smith |
Thomas Ault and Catherine Graham both work in Hewitt Associates’ retirement and financial management practice in Vancouver. Ault is a retirement consultant and Graham is a lawyer. thomas.ault@hewitt.com; catherine.graham@hewitt.com
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