In this post I will review a Participating Employer’s role in the Ideal Canadian Pension Plan.
As set out in the previous post, we are reframing the discussion with the Members of the ICPP. Members will concentrate on their retirement lifestyle choices—their personal benefit targets—and leave the investment process that supports these targets to the Administrator. In this way, Members focus on retirement lifestyle choices and not on investment choices.
We also want to reframe the discussion with employers. More than that, we want to reframe the employer’s fundamental role in the pension process. An employer will no longer be expected to be an administrator, investment manager, financial planner, trustee or fiduciary for the pension plan. The employer can focus on running the business.
The employer does have a very important role upon adopting the ICPP. It must establish the benefit support levels for its employees. However, once these levels are established, the employer’s role becomes the same as its role in the Canada Pension Plan. The employer deducts and remits pension contributions on behalf of covered employees. The employer is, in essence, an agent of the ICPP Administrator.
The ICPP will allow an employer to have an appropriate human resources response to its employees’ pension needs. It will enable employers to better retain employees once they have been trained to provide valuable services to the company. It will also allow the employer to better manage the retirement process once an employee is no longer able to provide those valuable services.
In summary, the Participating Employer will:
• Set contribution rates
• Set minimum benefit targets
• Continue to manage payroll
The ICPP Management Board will:
• Govern the ICPP
• Oversee plan administration
• Oversee investment of contributions
• Oversee member communication and support
• Oversee regulatory and legal requirements
We believe an employer who does not sponsor an appropriate pension solution is taking on tremendous human resources (operational) risk on behalf of its shareholders—often without the shareholders’ awareness.
The ICPP pension design and governance structure essentially eliminates individual employer risks. The ICPP Administrator provides support to all Members to allow them to participate fully in the ICPP. Any Participating Employer may also ask the ICPP Administrator to provide additional retirement planning support to its covered employees and pay for those extra services directly, at its sole discretion. This is not required. The Participating Employer can also pay for additional independent support for its employees from another third party but, again, this is not required.
Participating Employers will have representation on the ICPP Management Board, but no particular Participating Employer is obligated to participate. The Participating Employer may nominate a Management Board representative, or not. The Participating Employer may vote for its Management Board representative, or not.
Participating Employer’s must make a few decisions within the ICPP structure. The Participating Employer sets the Participating Employer contribution level and its Members’ required contribution level. The employer establishes the minimum target benefit for its Members. The employer also decides whether there will be a waiting period for its Member, subject to pension benefits legislation. That’s it.
To illustrate this process, we will review a few examples.
Example 1 – Participating Employer with Unionized Workforce
After negotiations, a Participating Employer agrees to adopt the ICPP on behalf of its unionized employees. The Participating Employer also agreed to a 4% Employer Contribution and a 3% Optional Member Contribution. The Participating Employer sets the CPP Double-Up Benefit target at 100% for these employees. There is no waiting period.
Most of the employees who work for this Participating Employer have total annual incomes that range from $30,000 to $60,000.
The Participating Employer and union agreed that a full career CPP Double-Up Benefit, in combination with the actual CPP benefit and the Old Age Security benefit, will allow most of the covered Members to maintain their lifestyle in retirement, especially for the lower paid Members. The combined 7% contribution is expected to be able to completely support this target under most circumstances. For those earning at the higher end of the pay range, additional Member Discretionary Contributions may be required to support a higher target benefit (e.g. 200% of the CPP Double-Up Benefit).
Most, if not all, of the unionized employees are expected to select targeted retirement between age 60 and age 65.
Those who elect a target retirement at age 65 are expected to be well served without making additional Discretionary Contributions. The total 7% contribution load is expected to be more than enough to provide the targeted CPP Double-Up benefit, and possibly more. These Members will likely make no Discretionary Contributions.
Those who elect a target retirement age of 60 will likely have to make additional Discretionary Contributions to support the CPP Double-Up target benefit payable at that earlier age. In fact, a Discretionary Contribution of 3% (total contribution of 10%) may be needed. For those with a target retirement age of 62, a Discretionary Contribution of 1% may suffice.
Members are helped in establishing their benefit targets and their target retirement ages as part of the enrolment process. They are informed whenever their target benefit payouts do not match their committed contributions well. They are then provided with ongoing support.
The union monitors its members’ decisions in aggregate. The union is prepared to negotiate higher contributions in the future if their members’ current contributions are insufficient to meet the target benefits. They understand that higher pension contributions may lead to lower wages because both are part of the total compensation package.
The Participating Employer and union are satisfied with this solution because they both agree that a career employee will be well served in retirement and that they have struck a reasonable balance between current pay and pension contributions.
These employees will probably not prioritize any other target benefit under the ICPP during their careers, but will likely have enough savings to meet their retirement targets.
From a Member’s point of view, this Participating Employer is providing a pension plan that provides for the Member’s basic lifetime needs in retirement. For low- and middle-income Canadians, this is essential.
The ICPP can also be quite complex when it has to be. To illustrate this we have created another example.
Example 2 – Early Retirement Window at the Same Participating Employer
The same Participating Employer has established a 4% Employer Contribution and a 3% Optional Member Contribution and set the minimum CPP Double-Up Benefit target at 100% for its unionized employees. A number of years later, the pension plan has worked relatively well and most of the employees are on target for their retirement goals.
The employer is restructuring, however, and would like to improve the members’ retirement savings to entice a few of the older employees to retire earlier than planned. They have decided, with the union’s agreement, that they will provide a retirement bonus of up to an additional six months of earnings to any employee who elects to retire before attaining age 64 and six months (employees will receive a proportionate payment if they retire before age 65 but after age 64 years and six months). This offer will be open for a three month period.
The employees will be eligible to deposit this payment into an RRSP and transfer the RRSP amount to the ICPP, subject to their current RRSP contribution room limits. Most employees have sufficient RRSP room to deposit the entire retirement bonus.
The employees will be encouraged to use the normal tools provided under the ICPP structure to determine whether retiring now and receiving this additional amount will allow them to meet their retirement goals. The company has also agreed to pay for a one-hour private session with a pension expert as part of the program to give anyone who needs it extra help in this analysis.
This arrangement is an early retirement window from the Company’s point of view. Much the same as early retirement windows that used to be offered under defined benefit pension plans.
The ICPP framework allows employees to get help very efficiently. The Company makes the necessary payments and meets its human resource management goals. The union ensures that its members are treated fairly. An important element of a defined benefit program is maintained.
Control of a Participating Employer’s Risk
A Participating Employer sets contribution levels and minimum benefit targets. Promises are not made to provide anything but the promised contributions when due. The Participating Employer has some residual risk should the ICPP not work well, but certainly substantially less than the risk taken on by a sponsor of a single employer pension plan.
The Participating Employer will likely reduce its administrative costs as compared to the alternatives.
The participating Employer will be able to use the ICPP to assist in human resource management by leveraging the ICPP pension management tools to its employees’ advantage. Many of the benefits of current defined benefit pension plans can be maintained, without keeping the inherent risks.
Most importantly, the ICPP has the flexibility to meet each Participating Employer’s unique needs.
In the next post, we will review why the ICPP will be of value to someone who is very close to retirement.