But options help employers entice older workers to stay on
Whether to stay active, fulfill personal goals or augment financial resources, many employees want or need to work past age 65. Most do not expect, and many don’t even want, the traditional notion of a “leisure retirement.”
Instead, many employees see retirement age as little more than a transition point from their prior careers to a new series of largely part-time employment opportunities.
Phased retirement advantages
For many, the ideal arrangement is a phased retirement in which they work fewer hours or days per week, or they work on a seasonal or project-oriented basis. From the employers’ perspective, the retention of older employees defers the cost of recruiting and training new employees and retains the all-important institutional knowledge possessed by workers who have been with the company for a long time.
But attracting and retaining the skills of an aging workforce requires a different set of rewards and HR programs from what many Canadian companies have traditionally offered. This is especially true of retirement programs.
Many employees who are interested in phased retirement would like more flexibility in the way they receive benefits from the pension plan. They want to work part-time but may need supplemental income. However, pension plans are limited in their ability to allow a partial draw-down of retirement plan benefits. Only Alberta and Quebec allow a partial in-service withdrawal of funds, and this withdrawal must be taken as a lump sum to avoid violating income tax rules respecting periodic payments.
In addition, employees who become eligible for early retirement subsidies under defined benefit (DB) pension plans have a powerful incentive to stop working to commence benefits, even if they would otherwise be interested in active employment with the same employer.
Employees who participate in DB pension plans are getting the optimal economic value from their pension plan if they retire on or after the earliest retirement age (usually age 55) but before the unreduced retirement age (usually between 60 and 65). However, these benefits may be collected only if the participant fully terminates employment. Accordingly, full separation from employment with the employer providing this benefit may be the best financial option for the employee. This is particularly true if she can continue working for another employer.
Rehiring a retiree
One strategy employers may consider is to rehire, as regular employees, retirees who have commenced pension benefits, including early retirement subsidies. However, if regulators do not recognize the retirement as a bona fide termination of employment, the employer’s pension plan registration could be revoked for allowing payment of retirement benefits while the employee is still active.
A variety of approaches could be used to establish that retirement has occurred despite the rehire. Some employers impose waiting periods before rehiring an employee in an effort to show a real termination has occurred. A risk associated with this approach is that, if heavily used, pension plan costs will increase due to over-utilization of the early retirement subsidies.
Hiring a retiree as contractor
A retiree can also begin receiving pension benefits while continuing to work for the employer, without any interruption, if the individual retires and is hired as an independent contractor and not as an employee.
To establish independent contractor status, the individual cannot simply perform the job she used to perform. Contractor and employee status is generally determined by looking at common law rules for determining whether an individual is an employee. One of the key factors is whether the employer has the right to control and direct the employee, regardless of whether that control is actually exercised. If the employer retains the right to tell the employee what to do and how the results should be achieved, the employee is probably still an employee. In many cases, however, it should be possible to change reporting relationships and duties sufficiently so there is little risk the individual will still be considered an employee.
A third way to facilitate phased retirement is through non-registered pension benefits. These arrangements are designed to supplement or top up benefits provided by plans registered under the Income Tax Act. Although more commonly used to provide pension benefits to higher-income employees, a non-registered plan could be used to provide temporary or lifetime pension benefits to an older employee, perhaps contingent on working for a specified additional period on a reduced schedule.
Making the system better
Postponed and phased-in retirement provisions in DB plans merit more attention from those responsible for government pension plans and those overseeing, regulating and running employer-sponsored plans. Employees who remain on the job should be able to customize their work and retirement program to maintain total net consumable income without having to change employers.
It should be possible for employees to reduce the hours they work, but still maintain their overall income levels through a mixture of pay and pension income. Employees should continue to accrue pension benefits to the extent they are working, regardless of age, even beyond age 69, and regardless of whether they are using a portion of their pension income to top up their total earnings.
Bernard Mercier is a principal with Towers Perrin in Vancouver. He may be reached at [email protected].
Instead, many employees see retirement age as little more than a transition point from their prior careers to a new series of largely part-time employment opportunities.
Phased retirement advantages
For many, the ideal arrangement is a phased retirement in which they work fewer hours or days per week, or they work on a seasonal or project-oriented basis. From the employers’ perspective, the retention of older employees defers the cost of recruiting and training new employees and retains the all-important institutional knowledge possessed by workers who have been with the company for a long time.
But attracting and retaining the skills of an aging workforce requires a different set of rewards and HR programs from what many Canadian companies have traditionally offered. This is especially true of retirement programs.
Many employees who are interested in phased retirement would like more flexibility in the way they receive benefits from the pension plan. They want to work part-time but may need supplemental income. However, pension plans are limited in their ability to allow a partial draw-down of retirement plan benefits. Only Alberta and Quebec allow a partial in-service withdrawal of funds, and this withdrawal must be taken as a lump sum to avoid violating income tax rules respecting periodic payments.
In addition, employees who become eligible for early retirement subsidies under defined benefit (DB) pension plans have a powerful incentive to stop working to commence benefits, even if they would otherwise be interested in active employment with the same employer.
Employees who participate in DB pension plans are getting the optimal economic value from their pension plan if they retire on or after the earliest retirement age (usually age 55) but before the unreduced retirement age (usually between 60 and 65). However, these benefits may be collected only if the participant fully terminates employment. Accordingly, full separation from employment with the employer providing this benefit may be the best financial option for the employee. This is particularly true if she can continue working for another employer.
Rehiring a retiree
One strategy employers may consider is to rehire, as regular employees, retirees who have commenced pension benefits, including early retirement subsidies. However, if regulators do not recognize the retirement as a bona fide termination of employment, the employer’s pension plan registration could be revoked for allowing payment of retirement benefits while the employee is still active.
A variety of approaches could be used to establish that retirement has occurred despite the rehire. Some employers impose waiting periods before rehiring an employee in an effort to show a real termination has occurred. A risk associated with this approach is that, if heavily used, pension plan costs will increase due to over-utilization of the early retirement subsidies.
Hiring a retiree as contractor
A retiree can also begin receiving pension benefits while continuing to work for the employer, without any interruption, if the individual retires and is hired as an independent contractor and not as an employee.
To establish independent contractor status, the individual cannot simply perform the job she used to perform. Contractor and employee status is generally determined by looking at common law rules for determining whether an individual is an employee. One of the key factors is whether the employer has the right to control and direct the employee, regardless of whether that control is actually exercised. If the employer retains the right to tell the employee what to do and how the results should be achieved, the employee is probably still an employee. In many cases, however, it should be possible to change reporting relationships and duties sufficiently so there is little risk the individual will still be considered an employee.
A third way to facilitate phased retirement is through non-registered pension benefits. These arrangements are designed to supplement or top up benefits provided by plans registered under the Income Tax Act. Although more commonly used to provide pension benefits to higher-income employees, a non-registered plan could be used to provide temporary or lifetime pension benefits to an older employee, perhaps contingent on working for a specified additional period on a reduced schedule.
Making the system better
Postponed and phased-in retirement provisions in DB plans merit more attention from those responsible for government pension plans and those overseeing, regulating and running employer-sponsored plans. Employees who remain on the job should be able to customize their work and retirement program to maintain total net consumable income without having to change employers.
It should be possible for employees to reduce the hours they work, but still maintain their overall income levels through a mixture of pay and pension income. Employees should continue to accrue pension benefits to the extent they are working, regardless of age, even beyond age 69, and regardless of whether they are using a portion of their pension income to top up their total earnings.
Bernard Mercier is a principal with Towers Perrin in Vancouver. He may be reached at [email protected].
