A common concern for HR professionals is how to attract and retain the right people. This is never easy, especially with a highly mobile workforce.
An important piece of that puzzle — and one often underestimated — is the value of an organization’s pension plan. So what makes a good pension plan?
There are a number of important principles every employer should consider when offering a pension, according to the Healthcare of Ontario Pension Plan (HOOPP).
Mandatory contributions: Any retirement savings program works best if contributions are mandatory rather than voluntary.
Professional investing: Professionals, not members, should be responsible for investing the money in the pension plan. Many employees have very little skill in investing and, if given a choice, often take the default. That means they miss out on growth opportunities professional investors would spot. HOOPP is able to do its investing in-house, which brings the investment cost down.
Cost sharing: When employee contributions are matched by the employer, the long-term goal for the pension plan is much easier to reach.
Investment and funding strategies: There should be strategies in place for investment outcomes and funding that outline what to do if a pension plan is underfunded and what to do if there is a surplus.
Replacement income target: There should be an objective to the investment of the pension money that provides an employee with replacement income in retirement.
Good governance: Employees and employers should have an equal say in how the pension plan is run.
HOOPP follows all these principles with its defined benefit (DB) pension plan. DB plans provide a pension based on a member’s service and earnings. So, for example, after 30 years of plan membership, a member can expect a pension that equals about 60 per cent of pre-retirement earnings when government benefits are factored in.
HOOPP is proof this model works. It’s one of the few major pension plans in Canada that is fully funded. The contribution rates are stable — they haven’t changed since the beginning of 2004 and won’t change until at least the end of 2013. When the economic crunch hit in 2008, every HOOPP pensioner received every single penny of their pension — and HOOPP is one of the few pension funds in North America that ended the two-year 2008-2009 period in positive territory.
An important aspect of HOOPP is it is a multi-employer plan. There are more than 370 employers that offer HOOPP — which serves almost 260,000 working and retired Ontario health-care workers. This means responsibility for ensuring the pension plan is adequately funded is shared across many organizations, rather than being on one employer’s shoulders.
HOOPP has found a strong pension plan is an excellent way to attract and retain workers. In recent research carried out for HOOPP, only 18 per cent of respondents said they would take a job somewhere that did not offer a DB plan.
In the last 30 years, HOOPP has seen a trend away from DB plans towards other types of retirement savings vehicles. However, these other approaches aren’t as effective.
RRSP contribution rates prove downfall of voluntary plans
The best example of this was at the end of 2009 when there was a whopping $589 billion in unused registered retirement savings plan (RRSP) contribution room in Canada — that speaks to the problems with voluntary savings programs. Those who did make RRSP contributions had, on average, only about $60,000 in savings at the time of retirement.
Few Canadians realize they need to save $20 for every dollar of retirement income they hope to receive. To receive $25,000 per year, $500,000 needs to be saved in an RRSP. There’s quite a gap between $500,000 and the $60,000 Canadians typically have at retirement.
If this trend continues — and fewer retirees have the security of a DB pension — we as a society will face the possibility of senior poverty. Seniors without adequate retirement income will be more dependent on federal and provincial support programs.
Another trend among retirees is bankruptcy. Canada’s seniors are declaring bankruptcy like never before, according to a survey by trustees Hoyes, Michalos and Associates. Last year, 16 per cent of all debtors who filed for bankruptcy were over 55. Inadequate retirement income, again, may be to blame.
If we collectively don’t take care of this issue today, we’ll be forcing our children to take care of it in the future.
The secret to success at HOOPP is caring for the future of those who care for us. That same degree of caring is critical in designing and delivering a pension program — by providing an adequate benefit for employees, employers will be taking a positive step towards ensuring workers can retire with independence and dignity.
John Crocker is president and CEO of the Healthcare of Ontario Pension Plan (HOOPP) in Toronto. For more information, visit www.hoopp.com.