This is Part 2 of a two-part series. Read Part 1.
The collective bargaining environment in recent years has been heavily influenced by employers’ desires to constrain labour costs, improve productivity and better manage their financial risks.
Less attention has been paid to the role of pensions in such areas as recruiting, retention and talent management. An employer’s bargaining objectives should also be informed by its HR strategy.
There are often significant gaps between the cost of a reward and its perceived value by employees.
A total rewards optimization study can help employers to assess the importance that employees place on certain pay and benefits options relative to alternative approaches, thereby identifying which trade-offs employees may accept without damaging their engagement level.
The Towers Watson 2011/12 Retirement Attitudes Survey found that roughly one-third of Canadians say they would give up some pay in exchange for greater retirement security.
Older workers (age 50-plus)—especially those with DB plans—are most willing to surrender pay, bonus opportunities and, to a lesser extent, paid time off for a larger and more secure retirement benefit.
The survey also found that pensions are a significant factor in workers’ decisions to join and stay with their current employer.
DB pension plans can be effective tools for promoting workforce stability, while also providing employers with greater predictability and influence over employee retirement patterns than is generally possible in a CAP.
While switching to a CAP design may reduce cost volatility, it can also open up other cost issues. An employee’s ability to retire under a DC plan relies heavily on the capital markets leading up to his or her intended retirement date.
Volatile investment returns and changes to annuity pricing can induce some retirement-eligible employees to continue working out of necessity rather than by choice. This can impede workforce planning and lead to higher labour costs in terms of severance, group benefits, absenteeism and overtime. Employers need to keep these factors in mind when setting their bargaining objectives.
Preparing for negotiations
Employers that have successfully reduced their pension costs through collective bargaining have used a variety of strategies. Laying the groundwork through effective advance communication with union leadership and employees is critical.
And helping plan members to understand the impact of the DB plan on the corporation’s financial statements and cash flow is an important first step.
Before entering negotiations, employers should do the following:
- know their history of benefit improvements relative to inflation and wage increases;
- conduct financial modelling of the proposed changes in different scenarios;
- know how their current and proposed benefits packages relate to their market comparators;
- assess, at least in broad terms, the plan administration and governance implications associated with proposed amendments; and
- anticipate the reaction of stakeholders such as unions, employees, retirees, investors, creditors, regulators and media, and develop an appropriate communications strategy.
- To accomplish this, employers need the tools, information and capability to do the following:
- assess the current state of their labour costs relative to their business plan;
- monitor potential changes in costs under alternative scenarios;
- benchmark how their costs/risks compare to industry norms;
- develop and test alternative program designs and approaches to optimize overall cost and risk; and
- manage a multi-faceted communications strategy that may involve diverse audiences.
The union’s bargaining representatives and employees will need time to evaluate proposed plan design changes and understand their implications.
In some cases, employers put forward proposals during one bargaining cycle in order to lay the groundwork for more serious pension negotiations at a later date.
Pensions represent a significant component of the total labour costs for many organizations and a significant asset for many Canadian workers.
With so much at stake, there will be continued debate and intense negotiation over pension benefits for unionized workers in the months and years to come.
Karen Tarbox is a senior consultant and John McIntosh is plan design issue leader in Canada with Towers Watson. karen.tarbox@towerswatson.com; john.mcintosh@towerswatson.com