Quebec, Ottawa look at phased retirement

But it’s a double-edged sword, depending on how employers use it

Pension laws are being rewritten to allow for phased retirement in Canada, giving employers another tool with which to hang onto valuable workers headed for retirement.

But whether phased retirement will work out to the employer’s advantage or not is all in the details, caution some pension consultants.

“The success of phased retirement relies on (the) ability of the employer to choose which employee will be entitled to it,” said Michel St-Germain, a Montreal-based actuary at Mercer Human Resources Consulting.

Understanding the workforce is critical — who’s retiring, when are they retiring and why — according to Gino Girard, a Montreal-based partner at pension and benefits consulting firm Morneau Sobeco. If used poorly, the phased retirement tool can backfire, he said.

Two bills have been tabled this year — one in Quebec and one by the federal government — to allow older workers to ease into retirement by drawing on their defined benefit (DB) pension and continuing to contribute to it at the same time. These bills follow changes to the Income Tax Act, which took effect on Jan. 1.

In Ottawa, a bill has been tabled to change the Pension Benefits Standards Act, which applies to federally regulated pension plans.

Quebec introduced Bill 68 last month to bring in similar changes. Manitoba brought in phased retirement in the 2005 Pension Benefits Amendment Act, but the measure has yet to be put in force. Alberta has had phased retirement since 2000.

The changes in both the federal and the Quebec bills target members of DB pension plans 55 and older who are entitled to an unreduced pension, as well as those who are 60 and older. Under both proposals, employees can receive up to 60 per cent of pension benefits.

Under the proposed bill, eligible workers don’t have to reduce their work hours in order to receive the pension payments. However, they do have to enter into an agreement with their employers, a stipulation that gives employers the discretion to offer the measure to individuals they wish to retain.

But it’s not always easy for employers to use this discretion, Girard said. In a unionized setting, the employer might get union approval to target specific groups of employees that are hard to find or that are retiring in high numbers. But it’s unlikely any union will agree to an employer making phased retirement available to one individual but not another if the two are doing the same job, he said. And it’s not just in unionized settings where employers might run into this kind of problem.

“You’re working next to someone, you both do the same job, but he’s paid both a salary and 60 per cent of his pension,” Girard said. “He’s walking the same corridor with two cheques in his pocket. It would be very hard for you not to wonder, ‘Who else received a yes and who else received a no? Is it because of discrimination? Is it because I’m 58 and he’s 56?’ When you get into one-to-one agreements, you risk running into other issues.”

Employers may try to skirt allegations of discrimination by setting up performance criteria around the offer of phased retirement, but as long as those performance criteria are soft issues that are hard to measure objectively, they might still run into problems, said Girard.

The measure can be advantageous for employers facing a mass retirement across the company, he said. Even then, however, the employer has to be careful how it structures the offering. If an employer offers phased retirement at 58 without taking into account that, on average, its workers retire at 60, it would be cutting two cheques to workers who had had no intention to retire in the first place.

“If poorly designed, phased retirement has the potential to be very costly to an employer,” said Girard. A better design would be to make phased retirement available a few years past the average retirement age, he added.

Similarly, St-Germain sees the biggest challenge for employers that offer this is managing employees’ expectations.

“A huge risk for employers would be in employees building an expectation of, ‘As soon as I’m entitled to unreduced pension, I can continue to work and double dip.’ Some employers will fall into this trap.”

For that reason, St-Germain sees limited interest among employers. Most will probably continue the current practice of negotiating with individual retirees to hire them back as contractors. Though they can’t accrue pensionable service, they’re generally paid higher to make up for that.

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