Since Jan. 1, 2008, the Income Tax Act (ITA) has allowed the payment of a pension to a plan member who continues to accrue pension benefits while still working. This type of arrangement has been officially termed a phased retirement program. Following this, a series of provincial and federal pension legislations have also been changed to allow such payment: the Quebec Supplemental Pension Plans Act, the federal Pension Benefits Standards Act, the Ontario Pension Benefits Act (not in force yet) and the Manitoba Pension Benefits Act (effective May 31, 2010).
The federal government presented the ITA change as one of the solutions to the expected mass exit of baby boomers from the workforce. More than two years after the introduction of these measures, how have employers reacted to them and what can they expect in the near future?
Apparently, the new measures have generated little interest in the pension world. Although the required changes to the provincial pension legislations have not yet been adopted by all provinces, there are other reasons for the apathy: the current economic situation has not been favourable and the new measures themselves are not conducive to the adoption of phased retirement programs.
Many private sector employers have cut their workforces, and many public service employers are now freezing their expenses or their payrolls. Under these circumstances, there is little need to retain an aging workforce, but that is taking a short-term perspective on the situation.
Also, most defined benefit (DB) pension plans have solvency deficits. Adding new liabilities or costs by adopting a phased retirement program is simply not conceivable for a number of plans at this time.
The new measures limit application. First, they affect only employers with DB pension plans—a small minority in the Canadian context (although potentially impacting a large number of employees). Employers without a registered pension plan or those offering a defined contribution plan do not need these measures to implement an effective phased retirement program.
Second, the new measures are most useful for DB plans that offer generous early retirement provisions. Plans that offer unreduced pensions at age 62 or 65 at the earliest do not currently face a mass exodus of employees at earlier ages. Plus, the measures are not likely attractive enough to retain older employees to be worth implementing.
The new measures are complicated to implement and administer, and their adoption in a pension plan is likely to increase its liabilities and cost. In some cases, where key employees are entitled to an unreduced pension, the measures could encourage early retirement. They also require complex pension plan changes and extensive employee communication. The changes to the payroll and pension administration systems may prove to be challenging, particularly if the program to be introduced offers very flexible conditions, such as the possibility of changing the percentage of the accrued pension that is payable during the phased retirement period.