February 25, 2019 09:30
Photo : Freepik
Companies that offer pension plans to defined contribution to their employees could face significant financial risk if their diet does not deliver the goods.
The plans defined benefit pension plans are less and less popular among employers in the private sector. This plan guarantees an income fixed in advance to a participant, the first day of his retirement until his death. With the lengthening of life expectancy, the beneficiary may receive the annuity over a longer period of time without having had to contribute a larger amount when it was active.
To avoid having to suffer from this longevity risk,and employers therefore tend to turn to the defined contribution plan. However, F. Hubert Tremblay, senior advisor to the field retirement at Mercer, explains that this plan is not without risk for the employer.
Financial risk for the employer
In February 2019, F. Hubert Tremblay presented the prospects of Mercer’s pension. On this occasion, he disassembled a preconceived idea, i.e. one that suggests that the defined contribution plan is without risk for the employer. These plans have their own hazards, the advisor has mentioned in an interview with the Journal of insurance.
In this plan, employees have the responsibility to accumulate enough capital to cover their retirement needs. As for employers, they must foster the proper functioning of the system. “Employers have a vested interest in helping their employees, to educate them on the different ways to place their money, on the level of contributions to be paid to obtain the largest matching contribution,” says F. Hubert Tremblay. Which is a first expense.
If they do not, a number of other financial risks that may apply to them. The first risk identified by the adviser regarding the management of the workforce. If the employees in the end of their career have not accumulated enough money to retire, they will have to work longer. In fact, younger workers are likely to progress less quickly, and eventually change jobs. “The hiring of new employees will then represent a cost to the employer. “
If the employer should help the employees to retire on time, it might choose to fund an incentive program for retirement, which is an additional expense. In summary, the more employers are going to be able to inform their employees about the departure, the less they’re going to end up with the negative consequences of defined contribution plans, ” says F. Hubert Tremblay.
Decline of defined benefit plans
Since the prohibition of the clauses of disparities in treatment, adopted in June 2018, all employees performing the same tasks within the same structure must be covered by the same type of retirement plan, regardless of their date of entry into service.
This decision of the government of Quebec’s goal was to promote the treatment of young workers, in their avoiding of being offered a defined contribution plan. This regime of capital accumulation are often viewed badly by the employees. It is presented as being less advantageous for some, particularly women, who have lower incomes and must make more effort than men to accumulate money.
For F. Hubert Tremblay, this measure has had the opposite effect. Employers are no longer interested in the defined benefit plan, instead of maintaining this plan to all their employees, they have preferred to opt for the defined contribution plan. A behavior that will ” precipitate the defined benefit plans in the abyss “. This decline is already underway in Canada.
F. Hubert Tremblay puts into perspective, however, the situation. “It is not necessary to demonize the pension plan to defined contribution,” -he said in the Journal of the insurance. According to him, ” this plan is not so bad for the employees of the younger generation. It allows them to see their account go up, what is concrete for them.”