Business leaders in Canada are well aware of the looming labour shortages that may grip their operations across the country. In a recent survey conducted jointly by Watson Wyatt and the Conference Board of Canada, CFOs and vice-presidents of HR were asked about their concern regarding the attraction/retention of highly skilled or high performing employees, in the short and medium term(next five years). Well over half were very concerned. In fact, one-third of respondents have implemented, or plan to implement, a phased retirement program, especially among the larger employers.

So it is easy to assume that the phased retirement changes proposed in the recent federal budget must be a great way to solve potential labour shortages. Starting in 2008, those who are eligible for an unreduced pension from their defined benefit(DB)plan, and are at least age 55, will be able to draw as much as 60% of their accrued pension while still continuing to accrue further DB pensions.

Does this budget proposal actually help? Not really—it depends.

On a macro basis, it doesn’t—phased retirement alone will make a small dent in the significant labour shortages expected in the coming years. To solve those we need an increase in labour productivity, immigration or off shoring(expanding operations abroad)—or more likely, all three.

But on a micro basis, it makes sense that many employers will try to keep their older skilled employees because of the talent, expertise and knowledge that many of these individuals have.

Let’s consider whether the pension plan should be part of the solution.

Many organizations already informally accommodate phased retirement: the individual starts his or her pension and then comes back on a part-time contract. Inevitably these are one-off arrangements—negotiated individual by individual. This has worked mostly because it was the only logical way to allow the individual to start to draw a pension and to continue to work for the same organization. But for some individuals, this may not have been the best arrangement for a variety of reasons, including loss of seniority, uncertainty of the length of the contract and loss of active member benefits. Typically, contract individuals are paid higher than salaried employees to compensate for these employment term changes.

Ideally, an organization needs to be able to pick and choose which individuals are most critical and to develop tailor-made phased retirement packages that meet the needs of the almost-retired employee and the organization itself. There is usually no “one size fits all” offering.

A formal phased retirement approach involves more than just money—it involves redefining meaningful roles, providing continuing training and development, and other non-financial “goodies” to appeal to the individual’s particular circumstances. In fact, these goodies, plus the ability to only work part-time, can be made so appealing to the employee that the overall remuneration package may actually be less than generous.

When designing the financial component, it is important to understand that the more generous it is(taking into account pay, bonuses, pensions and benefits), the more attractive it becomes for those who continue to work five days a week but who are otherwise eligible to retire with an unreduced pension. Simply put, a generous phased retirement program that is broadly offered within an organization may actually have the opposite outcome to what you intend: instead of keeping both those workers who had no immediate intention of retiring plus enticing the almost-retirees to stay, you might actually increase the numbers of days of “lost work” as a result of too high a take-up.

When an individual is contemplating whether to retire or take a phased retirement offer, he or she can quite easily work out whether the extra income, above the unreduced pension, is worth the days worked to earn it, even allowing for the value of any extra pension accruals. The individual can easily figure out that it is probably financially detrimental NOT to retire when eligible for an unreduced pension, since the additional pension accrual for an extra year worked may be less valuable than 12 monthly pension cheques. In other words, the pension value is decreasing by not actually taking the unreduced early retirement pension. That decrease represents an effective loss of income—a form of “tax” on the pay they are still earning.

There are numerous types of financial arrangements that can be made. Many types do not involve the pension plan at all—for example, pay the individual for four days of work per week, but only ask the person to work for three(the additional pension accrual will then be based on their four-day-a week pay). The amount of the abovementioned “tax” varies considerably, depending on the components in the financial package. The phased retirement approach permitted by Quebec and Alberta, which seemed rather crafty at the time that it was announced by these governments, in fact involves a fairly hefty “tax”, which is part of the reason why hardly anybody takes advantage of it in those provinces.

The proposed changes to the Income Tax Act, which will permit continuing accrual of the DB pension while receiving a portion of the unreduced pension, serve to reduce this “tax.”

Various other combinations of retirement/salary result in different levels of “tax” to the individual. Different individuals will have different tolerances for the amount of “tax” that they are willing to pay, if all the other components of the phased retirement offering are valued more highly.

It should be noted that the pension benefits legislation across the country does not yet actually accommodate this new federal budget feature. It is not clear at this stage how quickly this will happen, nor to what extent they may allow the employer the discretion to offer this solution only to certain individuals and not as part of a broader scheme.

But when the new rules are fully implemented, this may present quite an attractive solution for many individuals and may provide employers with a viable alternative to consider. However, as mentioned, the more attractive the offer to the phased retiree, the more attractive it becomes for the older worker who is continuing to work five days a week. In other words, unless the rules will permit this new federal Budget feature to be used sporadically rather than as part of a broadly communicated phased retirement program, employers may find it better not to make the pension plan part of the solution at all.

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