Pension Plan Dilemmas


Mention the words “pension planning” to most people and the typical response is one of underwhelmed excitement. Before your own eyes glaze over at the thought of reading the rest of this blog post, imagine yourself in the future, having completed a successful career and entering into retirement. Do you see yourself as financially secure or are you in financial peril?

One hopes that the vision you have for yourself is that of financial security. The means to achieve that security are dependent on the fiscal planning decisions you make now, or that are made for you by your employer through the enrolment of employees in a pension plan.

As we know from our compensation studies, defined pension plans come in two categories.

The first is the defined benefit plan. This program provides for “retirement income based on a proportion of the employee’s pay” upon retirement. This means that an employee would receive a set amount of income, once they retire, based on a calculation of earnings that the employer has invested on their behalf. The employer is responsible for managing the investment.

The second is the defined contribution plan. This approach provides for “retirement income based on the accrued value of employer and employee contributions to the plan.” This means that both the employee and the employer pay into the plan on a set percentage. The employee can decide how the funds are invested. The income upon retirement is subject to strict regulations, and the amount the employee receives is dependent on the overall value of the fund.

Which one is better? There are conflicting evaluations for both types of plans.

A critique of the defined benefit pension plan is provided here. As noted by the author, defined benefit plans seem to be increasing in risk, based on numerous and evolving factors. This type of plan appears to be on the decline as an effective tool for ensuring financial security in retirement.

The risks that come from defined contribution plans are explored here. This author identifies the risks that may be in place should the employee not know how to invest or access the funds accrued on their behalf once they do retire. Defined contribution plans continue to be implemented as a preferred option for both employers and employees though, compared to the defined benefit plan option.

In either case, it is important that employees know what their options are well before the thought of retirement becomes a reality and, with it, the need for realizing a financially sound future.

Discussion Questions:

  1. In your opinion, should Canadian companies continue to offer defined pension plans for retirement security to employees? Explain your rationale.
  2. If you had to choose between a defined contribution plan and a defined benefit plan for yourself, which one would you choose? Explain your rationale.
  3. What other types of retirement planning alternatives could an employer provide instead of defined benefit plans?

Pensions in Peril

Day Owl / Shutterstock

When companies go out of business, the extent of loss is significant. Sears Canada is yet another large retail provider that has made (or been forced to make) the unfortunate decision to close all of its services due to a lack of economic sustainability.

Along with all of the negative media exposure that came with Sears Canada’s inability to pay its employees their rightful severance and notice provisions, their existing pension plans are also in deep trouble.

According to a recent news item reported through Global News, Sears Canada had a Defined Benefits plan for its employees. What has come to light is the lack of funding on the part of the employer for that plan. The employer was obligated to provide financial support for the plan in order to ensure that the level of defined benefit would be available as required for employees once they moved into retirement and accessed their guaranteed pension funds.

This funding is not in place. What is more alarming, according to this news story, is that 30 % of companies in Ontario and an undetermined number in Quebec are in the same unfunded condition.

Click here to access the news story.

The article states that a defined pension plan provides for a set amount of funds to the retired employee, ‘at least in theory’. What we must learn from this example is that pension plans cannot be theoretical. The need is real for ongoing economic support, once employees make the decision to live on the income they think they have been promised, from their long-term employer.

There is another harsh lesson learned from this particular case. It reinforces the need for solid compensation planning, monitoring and adaptability on the part of the employer. Would the former employees of Sears Canada be better off if their employer had communicated the risks of the unfunded pension plan? Could some different decisions have been made before it was too late for those employees who envisioned a retirement plan based on a guaranteed level of income?

These are indeed theoretical questions that do little to help those employees facing poverty in retirement. This is a case of much too little, much too late.

Discussion Questions:

  1. How would you communicate the risks of a Defined Benefits Plan to employees in your organization?
  2. What steps could you put into place as a Compensation Manager to ensure that employee pensions are not in jeopardy?
  3. Identify the differences between a Defined Benefits Plan and a Defined Contributions Plan in order to convince your current employer to implement the one that is best for your organization.

The Giggers: Part 2

Even traditional retirement cannot escape the Gig Economy.

In a recent blog we looked at the new and expanding Gig economy, with this trend being discussed by Faith Popcorn in a Fast Company article. This HRM Canada article takes another perspective and it is called: Are we on a brink of a retirement revolution?

Click here to read more about the retirement revolution.

There are two main reasons: the Gig economy; and we are living significantly longer.

According to Morag Barret, Ph.D. author and seasoned HR professional, “Work is becoming more like tours of duty and statistics from the World Economic Forum say that within the next 10 years, 50 percent of the workforce is likely to be in the gig economy.” This means the Gig economy is strong and getting stronger. Think of the changes that could happen if you took 50% of the working population and placed them in a new employment structure; a structure that is fluid and variable in nature, where individual workers will move in and out of working time disperse with other activities such as sabbaticals, travel and volunteerism.

This is going to drastically affect our current understanding of employment careers. Combine the new Gig economy with the fact that workers in our society are living longer; sometimes 30 to 40 years past the traditional retirement date.  These factors will affect retirement and the system of full stop retirement may have to change.

In addition, the career ladder as we understand it is quickly disappearing. HR departments need to start thinking differently about how they are going to recruit, retain and train workers today and for the future. To succeed HR departments must understanding the new Gig economy and the retirement revolution that is fast approaching.

Discussion Questions

  1. What should HR departments be doing now to assist employees with the new retirement realities?
  2. What systematic changes should employers be considering now to ensure they keep, engage and retain older workers?

Succession Management in the Future

In the future, how long will an employee work? In how many jobs? The number will astound you!

Take a look at a report from the US Bureau of Labour Statistics from March 31, 2015, by clicking the link, below:

Click here to view the report

“Baby Boomers held an average of 11.7 jobs during the ages of 18 to 48.”

According to the report, most individuals had 11. 7 jobs over 30 years, and over half of those job were from the ages of 18 to 24.

Therefore, it is reasonable to assume that these individuals between 24 and 48 have held approximately 6 jobs over 24 years. Those numbers seem quite reasonable and manageable especially from a Human Resources point of view.

Now imagine taking that number, 6 per lifetime of a professional career, and increasing it over 600% to 40 jobs in a career.

Human Resources Management ONLINE (HRM) predicts employees in the future will have a retirement age of 100 and over 40 jobs in their career.

Click here to read the article

Imagining numbers like this, is mind blowing for an HR professional.  Think about how challenging succession plans will become? Are employees going to stay with one organization long enough? Are employees going to stay too long? It is hard to answer these questions, but it will fall on the HR professional to develop solutions no matter what the employment reality becomes.

 Discussion Questions

  1. How is HR going to manage recruitment, selection, and retention in this new employment era?
  2. Will succession planning become redundant or will it become more critical to organizational success?