The core of any employee benefits plan is the pension. But with DB plans, rapid changes in longevity have pushed the majority of funds into an underfunded position, and employers are increasingly closing plans to new entrants in order to get the deficit under control and reduce the pressure on the corporate balance sheet.
It is clear now that DB plans are a threat to many otherwise viable businesses. We can also be certain that they will be phased out over time, as directors will find it increasingly difficult to explain to shareholders why they should be underwriting the levels of liabilities that come with DB pension plans and what they get in return.
The new pooled registered pension plan (PRPP), however, could form the core of a new benefits package. Indeed, should auto-enrollment become part of the provincial enactment, as in Quebec’s case with its voluntary retirement savings plan, the employer will have an obligation to put this in place and may even be obliged to contribute.
This is a perfect opportunity to redefine the role of the employer in benefits provision. The new role could have four components: accessibility, education, scale and facilitation. This would have some associated costs, but those costs would be manageable, and, most important, this approach would not accrue future liabilities for the firm.
Accessibility refers to the provision of convenient access to a financial planner within the firm’s location. Given the pace of modern life, this would be appreciated by employees who have difficulty carving out time for this essential activity outside of their working hours.
Access to financial planners will complement the educational role of the employer that will automatically arise from the arrival of PRPPs—the need to explain clearly to employees what is available and why they are being auto-enrolled (in those provinces where auto-enrollment is introduced). This will allow education on a wider range of financial products as well as enabling more customized packages to be put together, suited to employees’ individual circumstances. It would also allow the outsourcing of education and advice to a trained professional, reducing the likelihood of firms being sued for provision of incorrect advice.
Given the scale of firms, it should be possible to negotiate lower charges and better benefits across a wide range of other financial products for employees. This would enable them to ensure their financial security at a lower price than if they were doing it themselves. Even small firms could negotiate good deals on the basis of offering access to a constant stream of new employees over the years.
Finally, the employer can facilitate the payment for these products through payroll deduction facilities. Most modern payroll packages allow sophisticated deduction and transfer facilities to allow employees to pay for these products out of their salaries before they get them, avoiding the trap of postponement and procrastination.
A final benefit to employees is that if they are paying, rather than the employer paying, they will be more attuned to the issues. Once involved in a proper employee benefits plan, their consciousness will be raised, and they are likely to remain engaged even if they move to an employer that does not provide these benefits; it’s an important point if we are to achieve the aim of raising the overall savings level of the Canadian population.
The arrival of PRPPs provides an opportunity for employers to recast their benefits programs to support and encourage their employees to achieve financial security without incurring huge liabilities. It is not an opportunity to be missed.
Tom Murray is head of product strategy at Exaxe. exaxe.com/blog