Employers and HR departments oversee employee benefits, and the importance of this aspect of compensation has never been more relevant. With nearly one-third of employees considering a job change in the last year and 7 out of 10 Canadian employees willing to quit their present position for a new job with better benefits, it’s clear you need to provide the right compensation mix for your team.
Retirement is undoubtedly at the forefront of employee benefits that should be prioritized, given that there is a direct correlation between retirement benefits and talent attraction and retention. With retirements increasing and employees’ needs and wants a much more important consideration than in the past, reviewing your organisation’s group retirement offering – if any – has never been more important. Setting up the right plan for your employees can involve a good amount of research and hands-on involvement, but it does not have to be an impossible task. We are here to aid you in the process. With Blue Pier’s expertise, you can navigate the world of group retirement offerings and ensure that your workplace pension plan truly supports your employees while preserving your bottom line.
What is an Employer-Sponsored Pension Plan?
Employer-sponsored pension plans, as the name suggests, are pension plans to which regular contributions are made to fund retirement income for retired employees. Contributions are by the employer alone or by both the employer and employees. In Canada, employer pension plans are broadly classified into defined-benefit (DB) plans and defined-contribution (DC) plans, both of which we describe below.
What is a Defined-Benefit Pension Plan?
In a DB plan, a retirement benefit is promised to an employee based on a formula that typically takes into account years of service and salary. The retirement benefit is paid in the form of a pension that continues for the life of the retired employee and the employee’s surviving spouse. Employees who terminate before retirement may be able to transfer the lump-sum value of their DB pension to another plan. This lump sum is called the Commuted Value.
Things to keep in mind with DB pension plans:
- DB plans are complex and expensive to establish and operate, making them unsuitable for small and medium-sized businesses.
- Few employers now sponsor single-employer DB plans because they involve a lot of financial risks. Employees have risk with DB plans too, because they may not get promised benefits if the plan’s sponsoring employer goes bankrupt.
- DB plans often develop funding deficits. When this happens, employers must make additional contributions to fund promised benefits which, once promised, cannot be reduced. Multi-employer DB plans also have financial risks. Benefits can be reduced if plan funding is not sufficient to pay promised pensions. As well, liabilities are pooled, which can result in some employers and members cross-subsidizing other, unrelated employers and members.
- When an employee leaves an employer and transfers the Commuted Value to another plan, there is often immediate taxation of some of the amount transferred.
What is a Defined-Contribution Pension Plan?
A defined-contribution (DC) pension plan is increasingly the most favoured type of workplace pension plan. DC plans don’t promise a particular benefit at retirement. Instead, employer and employee contributions (usually determined as a percentage of salary or wages) are made to member accounts. During retirement, the retired employee’s pension income is based on the total amount of contributions plus investment income accumulated over time in the account. Because each employee has their own “pension pot” or account, there is no funding risk for employers and no cross-subsidization among unrelated employers and members.
With most DC plans, members must choose investments by selecting from a list of funds provided by the employer sponsoring the plan. The employer must provide investment information and decision-making tools to the members to help them choose, and must also select a “default” investment fund. In practice, many DC plan members do not use investment information or engage in the investment selection process. These members end up in the “default” investment option, which may not be the best choice. In some DC plans, there is no investment choice. In these plans, the plan administrator manages the assets on behalf of members, which reduces the workload for members and the employer.
Because DC plans do not provide a specific benefit according to a formula, members do not know exactly how much pension income they will get in retirement. As with all pension plans, it is important for DC plan members to monitor their pension plan and obtain financial planning advice as needed to ensure that they will have accumulated enough pension savings and personal wealth to maintain the standard of living they want to have in retirement.
While some DC plans pay pension income directly to members, most do not because it creates work, risk, and cost for DC plan sponsors. With the plans that don’t, retiring members must use the money to buy an annuity from an insurance company or transfer the money in their pension accounts to another plan, such as an RRSP or RRIF. This creates significant work and risk for retiring members, and usually an increase in fees because they are transitioning from a group plan to a retail plan. As a result, it is usually better for employees to be in a DC plan that can pay retirement income directly and does not force them to transfer their money out.
Which is the Best Option for your Company?
Before choosing between a DB or a DC pension plan, you should evaluate your organisation’s resources and needs, taking into account the following:
- Both DB and DC plans come in two types – single-employer and multi-employer. With a single-employer plan, the employer is responsible for establishing and operating the plan and for regulatory compliance. This can be a significant burden for small- and medium-sized employers, especially for single-employer DB plans. With a multi-employer plan, the plan administrator (usually a board of trustees) is responsible for pension management and regulatory compliance. The employer just has to make contributions.
- DB plans can provide predictable benefits. Some employees prefer this. However, single-employer DB plans entail significant workload and financial risk for employers. Multi-employer DB plans typically have limited design flexibility for employers, and they expose both employers and members to the financial risks of other, unrelated workplaces. DB plans pay retirement income in one format only – a pension payable for life in equal monthly or annual amounts. Some members like this simplicity and certainty. Others prefer to have more flexibility.
- DC plans do not provide predictable retirement benefits. However, they do provide significantly more flexibility in terms of how retirement benefits are paid. DC plans also allow tax-free transfer of assets to other plans, which DB plans do not.
- Most DC plans require members to be involved in money management, which usually doesn’t work very well. DB plans (and DC plans with administrator-managed investments) don’t require members to choose investments. This usually results in better outcomes for members with less work and cost for both employers and members.
- Whether DB or DC, pension plans need to have scale to be efficient. Small pension plans can be quite costly for both members and employers. Large, scalable pension plans tend to have much lower per-member costs and can get access to better-performing, institutional-grade services.
The Blue Pier Advantage
Employer-sponsored pension plans are a top employee benefit option that Canadians look out for when choosing where to work. With the competitive market for talent, many employers are facing labour shortages. Four of five workers will change jobs to get a pension plan, so it is a smart choice for your enterprise to offer a workplace pension program.
Blue Pier™ combines the best features of DB, DC, and multi-employer pension plans:
- Administrator-managed investments: Working with RBC Global Asset Management, Blue Pier’s board of trustees manages plan assets so employers and members can focus on their businesses and their jobs.
- Low costs: Like all multi-employer pension plans, Blue Pier leverages scalability so that employers and workers get the best value.
- Low risks: Blue Pier members and employers have minimal administrative workload and no financial exposure to other, unrelated employers and members.
- Tax-free portability: Employees can stay with Blue Pier for life or move their money to another plan.
- Retirement income: Unlike most workplace retirement plans, Blue Pier members can receive retirement income directly from Blue Pier and continue to benefit from low fees and institutional-quality services throughout retirement
To learn more, get in touch with Blue Pier today and start a new future for your employees and your business.
