© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the February 2005 edition of BENEFITS CANADA magazine.
In this new era of pension funding crises and labour shortages, employers need to examine long-held notions about retirement. The result could be much-needed changes to both pensions and healthcare programs.

Monsanto. Stelco. Transamerica. Air Canada. The pension plans of all of these organizations, among others, were headline news in 2004. Some cut benefits, some fought regulators and some had conflicts arising from business acquisitions. More headlines have abounded over the past couple of years about Canada’s “pension funding crisis”, and others even rang the death knell for defined benefit(DB) pension plans.

There has never been more news about pensions, and most of it seems to be bad. How has this bad news affected the average Canadian’s retirement expectations? A recent national poll commissioned by TD Waterhouse showed, somewhat surprisingly, that Canadians are “generally not stressed about retirement planning.” Why? According to Patricia Lovett-Reid, senior vice-president at TD Waterhouse in Toronto, “The findings are further evidence of a major shift in how Canadians think about retirement. It would appear that an aging population base, looming labour shortages, the decline in DB pension plans and lower expectations of income from retirement investments have created a ‘perfect storm’ that is blowing away long-held notions of life after 65.”

At the same time, and even more in the forefront of public attention, there are significant concerns over the health of our healthcare system. The sizeable portion of healthcare resources currently consumed by retirees will also inevitably have a significant impact on retirement expectations and attitudes.

As we enter the second half of the first decade of the new millennium, we find Canadians, with some surprising complacency, giving up on their traditional retirement dreams. At the same time, pension experts cry for regulatory reforms to preserve the traditions of the Canadian pension system and dire predictions are made about healthcare sustainability.

If Canadians are abandoning traditional notions of retirement, perhaps the healthcare and pension industries and employer sponsors of benefits and pension programs need also to begin rethinking retirement. In the face of longer life spans, an aging(and healthier)population, possible labour shortages and the transition from muscle labour to mental labour, it seems inescapable that the concept of “retirement,” and therefore traditional retirement and benefits programs, must also change.

The result of rethinking retirement will likely alter how we approach benefits and retirement program design. Etymology can be a useful starting point in a rethinking process. Consider the Merriam-Webster dictionary’s definitions of retirement: (1)an act of retiring: the state of being retired; withdrawal from one’s position or occupation or from active working life; the age at which one normally retires;(2)a place of seclusion or privacy.

Traditional retirement programs take a group perspective and focus on the “withdrawal… from active working life” definition. These programs include: pension plans(both DB and defined contribution), group registered retirement savings plans (GRRSPs), retirement compensation arrangements(RCAs)or supplementary employee retirement plans(SERPs), deferred profit sharing plans (DPSPs), Old Age Security and the Canada Pension Plan, and post-retirement health and dental benefits.

Private pension plan sponsors must take a number of considerations into account relative to traditional programs. In the broad context, considerations include economic, demographic and fiduciary risks, as well as the risk of employee dissatisfaction with the plan design. In exchange for such risks, the broad context of traditional programs offers the sponsor the ability to manage their costs and enhance workforce management through attraction/ retention characteristics, early retirement offerings and general employee appreciation.

In the narrower context of actual plan design and operation, sponsors must also consider funding, administration and regulatory costs of the program relative to benefits that may take the form of retirement income, taxassisted savings or profit sharing.

The traditional context for retirement programs challenges both employees and employers in the modern context in a number of ways, including:
• Focus is on “one plan for many”;
• Weighing rewards against risk, and costs against benefits is highly complex, and highly subjective;
• Assessing value relative to costs and risks is exceedingly difficult;
• Implicit conflicts add complexity—for example, should effective cost management benefit the plan sponsor or employees?

Focusing on the definition of retirement as a “withdrawal from one’s position or occupation” forces us into a more individually oriented perspective, under which we might redefine retirement along the following lines. Retirement can occur at any time that an individual has sufficient resources to provide for needs, wants and desires. Retirement need not be permanent; it may be temporary or perhaps partial. Age is irrelevant.

Under this new definition, we can broaden our perspectives of what a retirement plan is to include:
• “Traditional plans”—DB and DC plans, GRRSPs, RCAs / SERPs, DPSPs;
• Government income security programs—Old Age Security, Canada Pension Plan;
• Other employer-sponsored wealth accumulation programs— stock option plans, stock purchase plans, nonregistered employee savings or investment plans;
• Individual wealth accumulation programs—RRSPs, non-registered investment portfolios, home ownership, etc.;
• Post-employment critical care and disability benefits;
• Lotteries, inheritances, children(in the context of extended families).

In this wider view, we can gain some new perspectives for retirement program design in a more modern context. As an example, the traditional “one plan for many” may no longer be adequate for a given employee group. Under our new definition of retirement, the traditional concept of “normal” retirement age becomes obsolete. Retirement plan requirements vary widely for each individual employee, as they consider their current employment circumstances in the context of their personal financial resources and options for full, partial or even temporary retirement. The recent trend by legislators to consider abolishment of mandatory retirement might, perhaps, be seen as a validation that a new definition of retirement is emerging.

The concept of “normal” retirement age, age 65, has long served as a common denominator that is fundamental to the design and funding of retirement and health benefit programs. If we are to begin “rethinking retirement,” we need to consider replacing this traditional common denominator, with new ones. Is there a common element, or are there elements, relating to retirement that most(or all)employees might desire?

The challenges of the traditional context for retirement programs mentioned earlier might be effectively addressed through a new approach based upon an updated definition for retirement. At the core of such a new approach, we can focus on the common element within any given employee group of the desire for information, education and advice relating to the financial and healthcare aspects of retirement. The first questions of most Canadians in respect of their retirement relate to how and when they might be able to afford the retirement they are considering, whether it is full, partial or temporary, and how can they address financial risks relating to health.

We need not abandon traditional retirement programs through this new approach. Instead, we can simply shift the focus to retirement education as the core of any given retirement program. From a cost perspective, retirement education need only consume a fraction of the financial resources dedicated to traditional programs(perhaps between 0.5% and 1% of payroll), and the balance of available financial resources can continue to be directed to traditional programs that will still be required for employees to be able to execute their own visions of retirement.

We can also investigate new ideas to allow benefits programs to address periods of partial or temporary retirement. Post-employment conversion options for health and dental coverage, plus individual “carve-out” contracts, priced and underwritten on a group basis for critical care and disability coverage, add additional financial flexibility similar to the common existing conversion privileges for continuation of post-employment life insurance coverage.

Under this new approach, the focus on “one plan for many” is shifted to personal retirement planning which allows the employee to better, and perhaps even fully, take into account his or her own personal situation and retirement goals and healthcare benefit needs. Plan members will be better equipped to address the issues of weighing rewards against risk, costs against benefits, and assessing value in their personal context. This might thereby relieve plan sponsors of much of the burden of these difficult issues relative to employee perspectives, and may also provide improved clarity for addressing any employee/employer conflicts which may be implicit within some plan designs.

Greg Hurst is manager, pensions at Heath Benefits Consulting in Vancouver. g.hurst@heath.ca