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Normandin Beaudry

Bill 68: Phased retirement and more

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There, in black and white

Bulletin NB Vol. 11 N. 6, April 2008

On April 2, 2008, the Quebec government introduced Bill 68 aimed at amending the Supplemental Pension Plans Act (SPPA). With this bill, the government hopes to offer defined benefit plan sponsors concrete measures for combating potential labour shortages.

This announcement confirms that Quebec is following suit with the federal government that introduced several amendments to the Income Tax Act (ITA) earlier this year. These amendments, which aim to promote phased retirement to encourage certain individuals nearing retirement to continue to work, took effect on January 1, 2008. The key measures announced in the Quebec bill are similar to those stipulated in the ITA and can be summarized as follows:

  • Going forward, a defined benefit plan could provide for the payment of a pension to members who continue to work and could allow these members to continue to accrue benefits in the plan.
  • To be eligible, members must have signed an agreement with their employer, be under 65 years of age and satisfy one of the criteria below:
    • be at least 55 years of age and entitled to an unreduced early retirement pension;
    • be at least 60 years of age.
  • Eligible participants could receive up to 60% of their accumulated benefits (life annuity and bridging benefit) while continuing to accumulate benefits in their pension plan based on time worked. Upon full retirement, the plan's pension will be determined without consideration of the amounts paid during the phased retirement period.
  • Members who receive phased retirement benefits will be considered active members and not retired members. As such, in the event of the member's death during the phased retirement period, the member will be considered to have retired on the day preceding his/her death.
  • Beginning January 1, 2009, the current provisions regarding phased retirement set out in the SPPA will no longer be in effect. However, members who made agreements with their employer before the bill's assent date will continue to avail themselves of these provisions.
  • As regards defined benefit plans with a defined contribution provision, the bill also provides for the possibility of paying a benefit other than a pension from the defined contribution provision. This benefit could not, however, exceed 60% of the pension the member would have been entitled to at the end of the previous fiscal year.

Other highlights of the bill

To support the measures promoting continued employment proposed in the SPPA, the bill also provides for some amendments to the Act respecting the Quebec Pension Plan:

  • additional pension would be payable to individuals who receive employment income after they have begun drawing Quebec Pension Plan benefits.
  • The additional pension would be equal to 0.5% of annual employment income after 2007 in excess of the basic exemption ($3500).
  • The additional supplement would be determined annually and would become payable beginning January 1 of the following year. It would subsequently be indexed annually, as for the pension from the Quebec Pension Plan.

The bill also proposes some amendments to legislations applicable to pension plan funding to supplement or clarify certain measures set out in this legislation. It also repeals the act that has established temporary funding measures since 2005.

Tools for promoting continued employment

The decline in the Quebec workforce is an undeniable fact. The government's strategy for maintaining the Quebec workforce is promising for Quebec and the entire labour market. However, this strategy is not necessarily appropriate for all employers because they will experience the labour market transformation in very different ways over time. To support their workforce management efforts, employers will certainly want to persuade some of their employees to work longer than planned.

Before amending the official pension plan text to allow for the application of the measures proposed by the governments, it is important for all employers to assess their workforce requirements, identify all the tools they have at their disposal to help them achieve their workforce management objectives and understand the expectations of their employees whose careers are winding down.

Pension plans are certainly very valuable tools for supporting workforce management efforts, primarily when the employer's needs target its entire workforce. When, however, these needs target only certain employees or job categories, other tools that are not universally applied, as is typically the case with pension plans, may also be used effectively. Tools available to employers include salary adjustments, retention bonuses, group insurance plans and departure allowance programs. Other possible and very promising solutions worth considering to better meet the expectations of employees nearing the end of their career are flexible employment conditions, additional vacation and leave without pay.

Significant impacts

The proposed measures have made an agreement between the employer and employee an eligibility requirement. How effective will employers actually be in managing these types of agreements on an individual basis? This question is vital, given the costs associated with these measures arising from the new benefits payable. If an employer is unable to withstand the pressure from employees who will most certainly want these measures to be applied uniformly and universally, the impact on plan funding costs will be significant. For example, phased pension benefits paid to an eligible employee over two years represent an increase of approximately 10% in the value of plan commitments with respect to this employee.

What impact will these measures have on employers' workforces? Employees nearing the end of their career are generally seeking a better work/life balance and would like to have more time for themselves. The proposed measures could allow employees to realize their dreams more quickly than expected, while bringing them additional financial support. Therefore, employees who are eligible for these measures and planning to retire in a few years could cut back their work schedule now and use the additional financial support they would receive to offset the loss of income. For employers, this will inevitably mean a decrease in their workforce.

The proposed changes to the Quebec Pension Plan are very appealing because they would resolve an issue that could previously have been considered a source of contention for retirees. This issue stems from the fact that, in many cases, the retirees were required to contribute to this plan if they continued to work, without receiving any added benefits in return. It is also worth mentioning that individuals who work full-time after age 60 are required to make contributions to the Quebec Pension Plan and are not permitted to draw their pension. They are therefore not eligible for the additional pension. We can expect to see a certain number of workers request to cut back on their hours (by at least 20% to be eligible for a pension) at age 60 so that they can benefit from the additional pension.

 

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