Retaining older workers: Is phased retirement the answer?

Recent legislative changes give employers and employees better options

Employers are undoubtedly concerned about keeping talent. A 2008 survey of senior finance and HR executives found 70 per cent were “very concerned” with attracting and retaining highly skilled and high-performing employees.

To address this concern, one-third of the 168 Canadian organizations responding to the poll by Watson Wyatt and the Conference Board of Canada had implemented, or planned to implement, a phased-retirement program.

Phased retirement is a general term to describe a mutually agreed upon employment arrangement that provides flexibility and financial incentive to an employee who wishes to wind down her career while continuing to provide services to her employer in some capacity. Phased retirement can also help employers keep older workers who possess expertise, knowledge and skills that are in high demand.

For years, many organizations have made informal phased-retirement accommodations on an individual basis by allowing an employee to retire, begin receiving the company pension and then return to work on a part-time, contract basis. However, the resulting loss of seniority, job security, active member benefits (such as medical and dental) and continued pension accrual made these arrangements less than ideal for the employee.

Barriers in the Income Tax Act (ITA) and in pension legislation also didn’t permit arrangements that would allow the individual to remain as an active employee, accruing additional pension benefits while at the same time receiving part of the company pension to make up for reduced salary for shorter hours.

But legislative changes made in the past couple of years provide employers and employees with better options for developing and implementing phased-retirement programs.

Legislative overview

In 2007, the Income Tax Act and Regulations were amended to allow defined benefit pension plans to provide qualifying employees with bridging benefits on a stand-alone basis or up to 60 per cent of their accrued pension while they continue to accrue additional benefits. The 60-per-cent limit is based on the amount of lifetime pension benefits (and bridging benefits) an employee would receive if she were taking full retirement.

An amendment to the federal Pension Benefits Standards Act (PBSA), which will permit an employer with a federally regulated pension plan to proceed with phased retirement, was passed in late 2007, but an effective date has yet to be announced.

The changes to the federal legislation enable employees to retain many of the benefits they would lose if they returned on a contract basis, while reducing the likelihood of a loss of income if they did not take early retirement. The ITA changes provide employers and employees with better options for developing and implementing phased-retirement programs that benefit all concerned.

In addition to the pending availability of phased retirement in the federal jurisdiction, Alberta, British Columbia, Quebec and Saskatchewan all permit pension plans in those provinces that offer similar phased-retirement benefits.

Keeping employees

While phased-retirement provisions are an important first step, retaining valued older workers requires consideration of other benefits.

“A formal phased-retirement approach involves more than just money — it involves redefining meaningful roles, providing continuing training and development, and other non-financial incentives to appeal to the individual’s particular circumstances,” says Ian Markham, director of pension innovation at Watson Wyatt.

Other ways to encourage older workers include incentives such as:

• targeted benefit and compensation programs designed specifically for older workers

• redefined, meaningful roles with opportunities for independence

• additional training and development

• work-life flexibility

• alternative work arrangements

• diversity and orientation training that covers ageism

• appraisal and review systems that are fair to older workers.

Issues to consider

The phased-retirement program should strike an appropriate balance between encouraging key employees to delay retirement and not tempting employees to reduce working hours earlier than intended.

Another important issue has not been conclusively resolved. While the changes to the federal PBSA appear to allow federally regulated employers to offer phased retirement on a selective basis, it is not certain whether the terms of packages offered can differ from person to person. Whether phased retirement can be offered on a selective basis or must be made available to broad-based membership is an issue that needs to be determined.

If it is certain employers can treat members differently — such as being more or less generous with the pension offering or refusing to offer phased retirement based on individual circumstances, without risk of being deemed discriminatory, or using plan assets to benefit some members and not others — then the pension plan route might prove advantageous.

Otherwise, employers will likely continue to create phased-retirement packages for individuals based on current pension plan provisions and instead use cash or other financial and non-financial rewards to entice an employee to continue working. It will be interesting to see how legislators and regulators address this issue.

Dean Taylor is a research lawyer at Watson Wyatt’s Canadian Research and Innovation Centre in Toronto. He can be reached at [email protected].

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