By Sheryl Smolkin

Whether you are early in your career or well-established, pay raises are important. They help you deal with the rising cost of living and are tangible recognition of your progression up the ranks in your organization.

Organizations typically create a “raise pool” which is the number of dollars they budget for all employee salary increases. While base pay may increase by two or three per cent on average, that does not mean that everybody gets the same amount. Depending on performance and other established criteria, employers generally try to give top achievers a bigger piece of the pie.

Aon Hewitt’s 2016 Canadian Salary Increase Survey of 347 companies projects base pay to increase by 2.8% in 2017, up slightly from 2.6% (including salary freezes and pay cuts) in 2016. Spending on variable pay is expected to be 15.4% of payroll —unchanged from 2016.

“The Canadian companies we surveyed are clearly reluctant to earmark higher compensation increases as they prepare for a highly competitive landscape in 2017,” said Suzanne Thomson, Senior Consultant, Global Data Solutions, Aon Hewitt. “On the plus side, fewer of them expect to freeze pay or cut salaries, and they are planning to keep already strong budgets for variable pay intact. That’s a key factor in their ability to attract and retain high performers.”

Fewer salary freezes expected in 2017
Financial challenges were reflected in the number of companies that froze salaries last year, but employers are forecasting fewer freezes in 2017.  Aon Hewitt’s research showed that 4.5% of employers froze 2016 salaries – in part due to continuing challenges in the oil and gas sector, which had the lowest total salary increase (1.2 %) of all surveyed industries after factoring in salary freezes and cuts. Next year, only 0.4% of companies overall expect to freeze salaries.

“For 2017, employers, including those in the oil and gas sector, may be feeling confident that the worst is behind them,” noted Thomson. “From an employees’ perspective, there might not be much upside when it comes to pay increases, but they can find some solace in the fact that the downside might be more limited.”

Salaries by industry 
Aon Hewitt’s research showed that most salary increases across sectors and regions are in line with the national average for 2017. However, workers in several industries can expect slightly higher-than-average or lower-than average increases. Among the former, employees in the automotive and auto-supply, chemicals, consumer products and life sciences sectors are forecast to see pay increases of 3.0% next year, while high-tech and professional services companies are expecting increases of 2.9%. Lower-than-average increases are expected in the oil and gas (2.2%), banking (2.3%) and transportation and logistics (2.1%) sectors.   

Top performers make more, continuing the trend
In 2016, Canadian employers put a premium on performance, allocating higher increases to top employees. Nine out of 10 surveyed organizations reported providing a variable pay plan and bonus payouts in 2016.  Compared with the 2.5% actual increase to all employee groups in 2016, employees classified as high potentials, top performers and those in key positions received an average merit increase of 4.4%.

The trend towards performance-based salary differentiation will continue in 2017, as the average merit increase among those top employee categories is forecast at 4.6%, compared with a 2.7% merit increase across all employee groups.

The average budget for variable pay in 2017 is 15.4%, unchanged from 2016. Two-thirds of organizations reported offering some form of long-term incentive (LTI) plan to their employees, most often at the executive level (72%). Performance-related share grants remain the most popular form of LTI, followed by restricted stock grants. 

“While the overall job market may be strengthening slowly, competition for high-performing employees remains high,” says Thomson. “In order to win the competition for top talent, organizations are continuing to differentiate compensation through variable pay programs.”

By Sheryl Smolkin

Today I’m interviewing actuary Karen Hall for savewithspp.com. Prior to her recent retirement, she was a vice president at the consulting firm Aon Hewitt, based in Vancouver. In addition to enjoying her retirement, she is continuing to explore cost effective and easy ways to create a steady income out of defined contribution (DC) pension savings.

Karen has 35 years of professional experience in the areas of pension actuarial consulting, flexible benefits consulting, senior management and HR leadership. She is also the author of the book, Risk Management Strategies for an Aging Workforce available on Amazon. Thanks so much for joining me today, Karen.

 

Q: Most Canadians in the private sector today have defined contribution pension plans. Tell me how a DC plan works.
A: Well, Sheryl, defined contribution means the contributions going in are defined or fixed. The member and her employer each contribute to the plan. The member often chooses how the money is invested from a number of investment options provided by the plan. Then, when the member comes to retire, she has a lump sum amount saved.

Q: On retirement, the conversion of DC assets into retirement income is for the most part left up to retirees. Why is that a problem?
A: If you buy an annuity you don’t get much in income for the amount you saved. The only other alternative is doing it yourself, that is, choosing investments, deciding how much to withdraw and figuring out how to make the money last for your lifetime. If you rely on advisers for any of this, you’re typically paying a substantial fee of at least 2% of your assets every year. The average person is just not equipped to make these decisions. I find it complicated enough and I’ve been living and breathing pensions for 35 years.

Q: Frequently, insurance companies or other DC or Group RRSP carriers, have group registered retirement income funds that retiring members of client group retirement plans can move their money into at retirement. Do these plans resolve some of these issues of high retail fees and poor financial literacy that you identified in our last question?
A: I don’t think they do. It would depend, of course, on the deal. But, often the fees are still quite high, near 2%, and the individual is still making all of the decisions I just mentioned.

Q: So how common are Group RRIF’s established for retirees of just one employer and what are the pros and cons of these types of arrangements?
A: Based on my experience, they aren’t that common. I can see why plan sponsor companies don’t want the ongoing administration. But I do think it would be great if the retiree could basically just stay in the plan and get the same investment options and fee deals as when they were active.

What I do see more often is where the insurance company that is the record keeper for the plan will have options for the member to transfer into their individual RRIF products, perhaps with a modest reduction in fees as compared to a retail purchase.

Q: How much clout do individual DC plan sponsors have in negotiating fees for their former members in rollover plans or single organization Group RRIF’s?
A: Well, as with everything, it depends on the size of the employer and on how much the employer wants to push for such a service. I do know of large employers who have negotiated such services.

Q: How should investment options be structured in rollover plans and single company Group RRIFs to maximize value from a DC plan in the decumulation phase?
A: In my view, the same options as when the member was active should generally be fine. The plan could add a target date type option for accounts and payments. But I think the typical choice of a range of balance funds and funds with conservative to moderate risk. You are going to live a fair number of years in retirement, so your time horizon isn’t that short.

Q: Saskatchewan and several other provinces, plus federal pension legislation, now allow payment of a variable pension from a DC plan – that means a stream of income that tries to simulate a defined benefit pension. Could you briefly explain to me how it works?
A: Well, it does depend on the plan and the legislation how they set it up, but very generally such an arrangement would allow the plan to provide payments to retirees. Like you said, it would simulate a defined benefit type of pension. There would generally be monthly payments and the amount of each payment would vary depending on plan experience.

For example, one client I know determines the amount of the monthly payment once a year. The amount is leveled for the year, so it’s paid every month at a level amount, but then it gets recalculated every January and depends on how well the fund did in the previous year. Generally – hopefully – it usually goes up or slightly or stays about the same. However, if it was a really bad year like 2008, the monthly pensions would likely be reduced.

Q: And how do they draw down funds in terms of various funds or investments the members are invested in or cash or whatever is actually sitting in the member’s account?
A: Well, in this particular one, when you retire and choose a variable pension, you have a lump sum amount and that lump sum amount gets translated into a number of units in the fund. Then, the fund pays a pension based on a dollar amount per unit, so the dollar amount per unit times the number of units you have, that’s what you get.

And what’s happening in this one is they’re insuring the mortality, so you don’t actually see your lump sum getting drawn down, you’re guaranteed to get that amount however long you live, and then the mortality is spread amongst the group.

Q: Oh, that’s really interesting. So it’s not just a matter of investments being sold and your money being distributed once a year, like if you had your own individual RRIF.
A: Right. So the plans can offer an individual RRIF and in those circumstances you’d see your money getting drawn down. But these variable pension ideas are to do with pooling the mortality risk.

Q: So to what extent have employers taken advantage of their ability to pay variable pensions to enhance the value of their DC plans to plan members in this all important decumulation phase?
A: As far as I know, not many have done so. Well, I know the one I gave in my example, but I don’t know of any other examples.

Q: And why do you think that’s the case?
A: Well, I think that it’s just new, right? CAP Guideline Number 8 says that plan sponsors should help members transition, but it’s new and sponsors are still considering their options. They are watching to see what others will do.

Q: Is there a real cost or a potential liability to employers that take on this responsibility?
A: That’s the big issue. For example, if you don’t have a big enough group, it’s hard to pool the mortality risk. The other thing is I’m not sure members are clamoring for variable pensions. Plan sponsors will pay attention when it affects active members and their appreciation of the benefit. I know there are plans that are interested in designing this and we’ll probably see how it develops in the next few years .

Q: Do you think it will be more of interest to public sector or private sector?
A: I think the public sector will have more ability to implement these and I think that union groups without a defined benefit plan might be interested.

Q: How important is effective employer communications in adding value to DC benefits for retirees in the decumulation phase?
A: Some employers are doing more to help members understand their options and prepare for retirement in the decumulation phase. For example, they provide one to three day retirement preparation seminars that can help considerably. I do still think, however, that individuals are not equipped to make many of these decisions. And you can put design features into DC plans that would help members better with the decision making.

Q: Could you give me an example of one or two of those?
A: Auto enrollment, auto escalation, and the design feature that we were just talking about — variable pensions — that would assist members with decision making in the decumulation phase would help.

Q: What role can annuity purchases play using all or part of the money in the plan members, DC account or RRIF to enhance the orderly draw down funds after retirement?
A: Annuities are expensive when the person is first retiring. However, I would definitely consider purchasing an annuity after about my mid 70’s. At that point, the insurance element becomes more interesting and significant because you don’t know if you’re going to live a few more years or a couple of more decades.

And the financial impact of living 2 or 20 years more is huge. The security that an annuity can give becomes much more worthwhile. So one strategy could be to separate your savings into two buckets: A: the amount you will need at age 80 saved via the annuity and B: the RRIF or the amount you’re going to spend between now and age 80. This is a bit easier to deal with, because the time frame’s better defined.

Q: That’s interesting. So do you have any other comments or suggestions that people are approaching retirement with a DC pensions or group/individual RRSPs to think about?
A: Well, focusing on just the DC pension is helpful, but I do think it’s also an incomplete solution. If the person has properly saved for retirement, he/she doesn’t have just one DC or Group RRSP account.

Even if they combine savings from previous employers, the spouse probably has registered savings, both spouses might have their own tax-free savings account and they probably have non-registered money too.

All these sources of income must be coordinated so the individual can meet their retirement and personal financial goal. Either the person has to educate themselves to manage on their own or they need help in finding an appropriately qualified financial adviser to assist them.

Right now in Canada, the price of such assistance is, in my view, unreasonably high. I also feel that many financial advisers do not have much experience with effective decumulation of retirement savings. Individuals have to look hard to find the right person.

Well, thank you very much. I really appreciate that you spoke to us today, Karen.

You are very welcome. It’s a pleasure, Sheryl. Thank you for asking me.

—
This is the edited transcript of an interview conducted by telephone in July 2015.

By Sheryl Smolkin

If you haven’t factored health care costs into your retirement budget, it may be time to take another look. Saskatchewan Health Care covers provincial residents for a whole host of services including all medically necessary doctors’ visits and hospital care. But other services such as drugs (until age 65), dental care and physiotherapy outside an approved institution are typically not covered.

Members of employer-sponsored group health care plans have some or all of these expenses reimbursed. But according to a new survey from benefits consulting firm Aon Hewitt, nearly half of Canadian employers do not offer any post-retirement health benefits.

Aon Hewitt’s survey of 225 Canadian employers reveals that 44 per cent of the respondents do not offer any retiree benefits at all, while another 10 per cent have closed their existing programs to future retirees.

Of those employers not offering retiree benefits, the most often-stated reason (76 per cent) was “high costs compared to perceived benefit to employees,” while 66 per cent specifically blame rising healthcare costs.

However, about 20 per cent of respondents say that they would consider offering retiree health benefits such as drug, hospital and dental benefits if the costs were fully or partially-paid by retirees.

Even if your employer does offer some form of retiree coverage, it may not be the same as the coverage you are eligible for as an active employee. For example, your employer may offer you:

• A lump sum at retirement in lieu of future health care premiums or benefits.
• A defined annual contribution to health care premiums leaving you responsible for paying the balance which may increase each year.
• An annual contribution to a health care spending account you can use to by individual health care or to pay for actual expenses for services (i.e. physiotherapy, glasses).
• A retiree benefit plan that is 100 per cent self-funded.

When your workplace health and dental benefits end at retirement, you have three basic options:

• “Follow Me” products offered by all of the major insurance companies are available to former members of employer-sponsored group benefit plans within 60 days after retirement.
• Groups like university alumni associations, professional groups, the Canadian Automobile Association and the Canadian Association of Retired People (CARP) have “affinity plans” for members.
• Insurers like Saskatchewan Blue Cross sell individual plans.

All three types of programs offer basic health and dental plans plus different levels of enhanced plans. Your premiums will be based on the features in the plan you select, how old you are and your health status when your plan kicks in. Dental plans cannot be purchased on a “stand alone” basis.

So how do you figure out what’s best for you?

First, make sure you have plenty of coffee. Set up a spread sheet and try to do an “apples to apples” cost/benefit analysis of the health and dental plan features that are most important to you.

Insurance carriers offering Follow Me programs, affinity groups such as CARP and carriers with individual products like Saskatchewan Blue Cross have websites with detailed information and you can quotes. They also have information lines you can call for assistance. Websites like Kaneix.ca allow you to compare a series of online quotes from different carriers.

Depending on your health status, one reason to opt for a Follow Me Program if you are eligible is that acceptance is guaranteed with no medical questionnaire at the time of application, and no waiting period for coverage. Unlike some other plans, you can also move from a basic plan to plans providing higher levels of coverage at a later date without medical evidence of insurability.

Of course the real problem is that once you are no longer covered by an employer plan you will pay more for less. Coverage is extremely limited as compared to more robust workplace health and dental plans you may have been covered by in the past.

If you are contributing the maximum annual amount to tax-free savings accounts, that may be one source of funds for unexpected medical costs in years when you exceed private insurance plan benefit coverage.