The article “How Employers Can Boost Employees’ Financial Security Even As Pension And Insurance Benefits Shrink” was originally published on Financial Post on November 23, 2020.
Companies are in a unique position to help their workers without huge costs if they think outside the box
Historically, companies have provided pension plans, insurance coverage and other tools to support their employees financially. Some are reducing these perks, shifting the responsibility for financial literacy onto workers, while others are considering new ways to help their employees.
The coronavirus pandemic, which has threatened the financial security of many businesses and employees alike, has added some urgency to this transition, but many of the changes are unrelated and have been happening for some time.
Public sector unions have fought to preserve pensions and benefits for their members, recognizing the value to employees. The private sector has seen a prolonged reduction in pension coverage, and insurance benefits have been under pressure, particularly at companies that offer retiree benefits.
One in two Canadians report their performance at work is impacted by stress caused by their personal finances
Employers can pay their employees in different ways, including indirectly through their group retirement and benefit options. Employees who receive all their compensation in cash may not save for retirement or purchase insurance coverage — or may not do so as efficiently — if they are responsible for doing so themselves.
Defined benefit (DB) pensions, defined (DC) contribution pensions, or group Registered Retirement Savings Plans (RRSPs) have advantages over saving in an individual’s RRSP. Contributions can be easier to make right from an employee’s paycheque, and the costs are often less than the investment fees paid by investors using traditional retail investment options on their own.
Healthcare of Ontario Pension Plan (HOOPP) and Abacus Data conducted a survey in the spring of 3,500 Canadians about preparedness for retirement. Despite the lockdown, increased unemployment and other pandemic fears at the time, 74 per cent of respondents said they would accept a slightly lower salary in order to receive a better (or any) pension.
“Remarkably, this holds true regardless of how impacted they were by COVID-19. Seventy-nine per cent of Canadians whose finances were negatively impacted by COVID-19 a great deal would prefer their employer make direct contributions to a pension plan rather than receive that money as salary,” according to the survey.
A prime motivation for employers who reduce pension coverage is to reduce their costs. Since employees may be willing to redirect current salary or future salary increases to pension contributions, there could be a win-win for companies and their staff.
The Colleges of Applied Arts and Technology (CAAT) Pension Plan may have a solution. According to John Cappelletti, CAAT is “simplifying defined benefit pensions so that more working Canadians in the private, non-profit and broader public sectors can have access to adequate income in retirement.”
CAAT’s DBplus program is open to employers who offer no pension currently, wish to transition from a group RRSP, are converting an existing DC pension, or have a DB plan they are managing on their own and wish to outsource.
CEO Derek Dobson says about half of the 15,000 new plan members CAAT has welcomed over the past year and a half since the program was rolled out have come from non-DB pensions, helping buck the trend in declining DB plan offerings.
Insurance coverage is an important employee benefit for many workers. As a financial planner, I am often surprised by the value placed on health and dental coverage relative to other more important coverage. The annual maximums on group medical plan reimbursements often result in an employee paying somewhere between nothing, if they are lucky, and $2,000 in premiums, in order to get back somewhere between nothing, if they are healthy, and $2,000 in reimbursements. Ask any massage therapist when they are the busiest, and it tends to be those with benefits trying to squeeze every last co-pay out of their group plan in December for what are arguably not medically necessary medical expense costs.
Meanwhile fewer than half of employed Canadians have disability insurance coverage at work, according to a 2018 RBC survey. Among those without coverage, 84 per cent say they have not purchased coverage themselves. For those who have coverage, I can say from experience that many plans fall short of replacing an employee’s full income if they become disabled or may not provide protection after the first two years of disability. Both scenarios present risks in the case of some long-term disabilities. If someone becomes disabled and cannot work, their future lost earnings could be into the millions of dollars depending on their age and income.
Most group disability plans require the employee to pay the premiums, meaning that offering disability coverage may not present a direct cost to the employer beyond arranging the opportunity for employees. If co-ordinating a group plan provides the nudge to an employee to get covered and costs nothing to the employer, it seems like a good way to help employees improve their financial security.
There are federal and provincial tax incentives for companies to hire students, invest in scientific research and experimental development and promote environmental sustainability. Why not incentivize employers to offer group disability insurance to increase coverage and reduce premiums? Otherwise, consider requiring it for employers whose payroll exceeds a certain threshold.
There are tax deductions for employees who contribute to retirement plans to save for the future. Why not incentivize workers to protect their ability to provide for themselves and their dependents in the future by offering a tax deduction or credit related to insurance coverage? After all, health-plan premiums can be claimed as a medical expense tax credit.
Many employers offer saving programs like DC pensions, group RRSPs and non-registered savings plans. Employers should be reviewing the investment options for employees, as there are solutions to reduce fees below one per cent and even less than 0.5 per cent depending on the size of the plan and the services offered to employees by the provider.
There may even be opportunities for employers to think outside the box on savings plans and matching incentives. Many employees do not participate in group savings plans. It may be that they prefer contributing to a Tax Free Savings Account (TFSA). Group TFSAs are still uncommon despite TFSAs being available for 12 years now.
In addition, some employees would prefer to repay debt such as a mortgage or student loan with their extra cash flow instead of investing. This could present an opportunity for an employer to match a portion of an employee’s debt repayment using the same terms — percentage or dollar amount — as the savings plan offering. A matching “bonus” could be paid annually upon presentation of a certified letter from a lender confirming the extra payments made during the calendar year.
Company-paid services related to an employee’s retirement counselling are a tax deductible expense for an employer but are not considered a taxable benefit to the employee. Retirement planning can be a way to compensate an employee on a tax-free basis, while supporting their financial literacy and security.
Employee assistance programs (EAPs) have become more robust in recent years, including a focus on financial wellness, credit counselling, and other money matters beyond the traditional therapy services historically offered by providers.
One in two Canadians report their performance at work is impacted by stress caused by their personal finances according to the Canadian Payroll Association. This should cause senior management to look for ways to help employees for the good of their business, let alone to support their staff.
It may be debatable whether employers should bear the primary responsibility for the financial literacy and security of their employees. Individuals must be responsible to a degree as well. It is, however, clear that companies are in a unique position to help their workers, and in some cases, the benefits, even to the employer, can outweigh the costs. Government incentives, proactive HR managers, and employee initiative can all lead to a more financially savvy and secure workplace that can benefit everyone.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
