Jaqui Parchment has seen firsthand the effects the shift from defined benefit pension plans to defined contribution plans has had on employees and employers.
As senior partner and leader of Mercer’s Investment business for Canada, she provides consulting services to Mercer’s largest clients on investment issues. Retirement readiness, she says, is a major concern for her clients.
“It’s had its ramifications,” she says. “The most obvious one is the risk in terms of providing retirement is shifting more towards the employee from the employer.
“Whereas before, with the defined benefit plan, employees would know that they had certainty around their level of income in retirement. Now, the employee faces the uncertainty of not knowing what that income is and having to plan around it.”
That uncertainty has tangible consequences for Canadians. Employees with defined contribution plans can expect to be working longer into their retirement years, leading to concerns about workplace efficiency and retirement readiness, a recent survey by Willis Towers Watson shows.
The global advisory, broking and solutions company says that Canadians can expect to work an average of three years longer. Its retirement index suggests that funds needed in 2014 for a worker with a DC plan to retire at 66 are now only sufficient at a retirement age of 69. The result, it says, are employees working longer into their retirement years not because they want to, but because they have to in order to support their lifestyle.
“There was an expectation that they would adjust downward their lifestyle but instead, we’re seeing that people will work longer into their late 60s and early 70s,” says Jeff Kissack, senior retirement consultant at Willis Towers Watson.
The result, he says, is not just a detriment to employees working longer as they grow older, but to the employer, as well.
“You will see, and we are starting to see already, disengaged, older employees,” he says. “It’s going to be a big issue for employers 10 to 15 years from now.”
While the expansion to the Canadian Pension Plan is expected to help prepare future Canadians on their path to retirement, the effects of the expansion won’t be felt for several decades, leaving those set to retire earlier under DC plans more vulnerable than those on DB plans.
A maturing work force in which people aren’t retiring when the employer would like them to poses other difficulties, Mr. Kissack says. Employees can see a decline in health, productivity and worker engagement. Meanwhile, employers are faced with the choice of whether to keep employees at a decline to productivity or pay out the severance that comes with terminating a long-term employee.
It’s an issue that employers are recognizing and attempting to get ahead of. A growing number of employers plan to give greater attention to benefit adequacy and retirement readiness over the next two years, Willis Towers Watson suggests. Its survey of more than 120 Canadian employers found that 58 per cent of those that provided a DC plan as their only type of pension see their employees’ retirement benefit as the top risk today with regards to retirement plans. The survey included a range of small, medium and large Canadian employers across major industries. However, companies surveyed were reluctant to express their concerns publicly.
What happens, Mr. Kissack explains, is that employees with defined contribution pension plans are getting toward the age of retirement but realizing they don’t have the money they need to retire.
Retirement-benefit adequacy and the financial well-being of their workers are a growing concern among employers,” Mr. Kissack says. “This is particularly true among employers that offer only a DC plan. In the private sector, the shift to DC plans is prompting employers to devote more resources to promoting retirement readiness.”
Many companies have shifted from DB plans, which promise to pay out a set amount when you retire, toward DC plans, where the investment risk is shifted toward the employee. According to Michelle Loder, partner of DC solutions at human-resources consulting firm Morneau Shepell, the shift from defined benefit to defined contribution plans has been a global trend for the past 20 years, and shows no signs of reversing.
“The impact of low interest rates on how pensions were valued, coupled with tumultuous capital markets and increase in regulatory environments, and the challenges those bring, led employers to believe it was time to move the risk down toward the employee level,” Ms. Loder says.
But now, she says employers are starting to think about other risks that their decision to shift has created. There’s an increased interest in how employees are managing, whether they’re going to be prepared for retirement, and what the implications are if they aren’t.
“There’s a lot of focus on these aspects and the need to measure and manage those aspects of the work force because they have bottom-line consequences today for businesses,” Ms. Loder says.
Ms. Parchment agrees, saying there is a connection among financial well-being, employee health and workplace productivity.
“Employers want to do the right thing, but there’s also a really strong financial imperative to finding solutions because if your employees are worried about their financial well-being, that has an impact on their health and that in turn has an impact on their productivity.”
Source: The Globe and Mail