Eliminating Mandatory Retirement: Impact On Pensions And Benefits
By: Linda Byron & Mark Newton
The impact of ending mandatory retirement on pensions and benefits has had little impact in jurisdictions which have already eliminated it. Linda Byron and Mark Newton, of Hewitt Associates, examine some of the possible changes.
Ontario has announced that it is committed to ending mandatory retirement. However, the government is proceeding cautiously, releasing a consultation paper and soliciting input on how best to change the law. The submission period for comments is now over and legislative amendments are expected to be introduced this spring.
One of the areas on which the consultation paper sought feedback was pensions and benefits. What will the impact on pension and benefit programs be for Ontario employers when mandatory retirement ends?
Will There Be Any Impact?
An obvious comment is that eliminating mandatory retirement will have little or no effect on pension and benefit plans unless a large number of employees choose to work past age 65. Data collected from provinces where mandatory retirement is already outlawed (Alberta, Manitoba, Quebec, Prince Edward Island, and the Yukon and Northwest Territories) suggest this is unlikely. In fact, data from Perspectives on Labour and Income: Fact-sheet on Retirement shows that the median retirement age between 1996 and 2000 increased in some provinces that still allow mandatory retirement, while it decreased in others that eliminated it.
Hewitt’s ‘Trends in Canadian Retirement Programs 2004’ survey results confirm these findings. Reaching mandatory retirement age was among the top three factors in the decision to retire for only five per cent of the 567 retirees polled. (The dominant reason was because respondents no longer enjoyed their work. Others were swayed by early retirement incentives.)
Looking ahead, however, are shifting demographics and other factors likely to influence employees to retire later? Canadians are living longer and seniors are more healthy and independent than in previous generations, so that working past age 65 is an option for many.
Additionally, employers may need employees to work past age 65. The survey found that employers are concerned about the impending shortage of workers. When asked what effect the baby boomers’ mass retirement would have on their organizations over the next 10 to 15 years, 73 per cent indicated there would be some, if not significant, impact.
Employees may also need to work past age 65. If they only work to normal retirement age, they may not have saved enough to finance their longer post-retirement lives.
Moreover, they may want to work past age 65. In fact, if they could turn back time, one-third of retirees say they would have worked longer.
Impact On Pensions
Assuming that all other retirement laws and regulations remain the same and the number of working seniors increases, what bearing will the elimination of mandatory retirement have on pensions? The impact will vary depending on whether employers offer a Defined Benefit (DB) or Defined Contribution (DC) plan.
DB plan sponsors may actually save money by having employees work longer. Although benefit levels would be higher for those electing to extend their careers, the payments would be made over a shorter period of time.
On the other hand, the cost impact on DC plans will vary with plan design, but could be significant depending on who decides to work longer. Because the contributions in a DC plan are often based on a percentage of salary or length of service, it will cost more to continue making contributions for senior, longer-service, and higher-paid employees than it will for more junior, lower-paid positions.
One further note concerns the current trend away from DB to DC plans. From an employee’s perspective, there is much less incentive to retire early in a DC plan, where the longer one works, the more pension assets one accumulates and the shorter the payout will be for those accumulated assets. If a large number of employees opt to work past age 65, plan sponsors might face sizeable cost increases.
Impact On Benefits
For employers who already provide post-retirement benefits, there may be no real effect on providing benefits to a post-65 worker as opposed to a post-65 retiree, depending on the plan’s terms regarding the level of benefits and who pays for them. For employers who do not provide post-retirement benefits, however, there may be extra costs involved in providing benefits for older workers.
Many group life insurance contracts already cover employees to age 70. Others eliminate coverage at age 65. Where coverage continues beyond age 65, premiums are often higher since they depend on personal characteristics, including age, that affect actuarial risk. Any changes to the law should take these differences in coverage into account and, preferably, clarify that employers are not required to continue coverage beyond age 65 if they do not already do so.
Some special considerations arise with regard to disability insurance, particularly long-term disability (LTD). The intention of LTD coverage is not to cover people for life, but rather to provide income replacement for the duration of their expected working life if they had not become disabled. Most LTD contracts state that LTD benefits cease at age 65 because traditionally this has been the age at which pension benefits start. Canada Pension Plan (CPP) disability benefits, for instance, cease at age 65 when CPP pension benefits begin. The concern is that, depending on how mandatory retirement is abolished, that age limit may become discriminatory under Ontario law and possibly also under the federal Charter of Human Rights.
The experience under Manitoba’s Human Rights Code is instructive. For more than 20 years, it has prohibited discrimination on the basis of age, with no exemption for the treatment of those over age 65. Despite that, the Manitoba Human Rights Commission (MHRC) has recognized that it is difficult to determine when an employee on disability leave has retired. The MHRC has stated that it would not be discriminatory to terminate LTD benefits at age 65, unless there is a reasonable expectation that the employee will recover and return to work. If similar allowances are made in Ontario law, employers will not be subject to potentially large extra disability insurance costs due to employees seeking to continue collecting benefits beyond age 65. However, this approach may yet be subject to challenges under the federal charter.
In terms of drug costs, having more workers over age 65 could mean reduced drug costs for employers, as the bulk of seniors’ prescription drugs are covered by the Ontario Drug Benefit Plan. Employers would remain at risk of additional costs, though, if government coverage changed.
Minimizing The Impact
If benefits coverage is not limited to age 65 and below, an end date of age 69 for benefits entitlement would seem to make sense and be less discriminatory, given present income tax rules requiring that pension benefits must commence no later than age 69. Workers who continue working past age 69 could use their pension income to help offset the loss of benefits.
The potential impact on pension and benefit plans will best be minimized by keeping any changes simple, clear, and consistent with other jurisdictions as much as possible, and by co-ordinating the Ontario approach with other government programs. At the very least, regulators should consider how employees might phase into retirement and use part of their pension to make up for the shortfall in their income.
In addition to eliminating mandatory retirement, the Ontario government will hopefully provide some level of certainty with regard to the treatment of pension and group benefits for employees who remain at work beyond age 65.
Linda Byron is an actuary and Mark Newton is a lawyer in Hewitt Associates’ retirement and financial management practice.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -