We all know that the ongoing global pandemic has been challenging for individuals, businesses, governments, and financial markets. Perhaps the greatest challenge is that faced by your employees. During this time, many Canadians are now asking themselves about their financial and job security and how well they are actually prepared for retirement when it arrives, and what will that look like especially during these uncertain times. Financial security not only affects employees’ certainty to stay with their current company but can also impact their performance at work and mental health.
What Can Employers Do to Assist?
A good starting point begins with employees’ level of financial literacy and this can be improved through good education and communication, which can be integrated into the company’s overall compensation strategy and program delivery. For example, if the employee’s financial target is 70% of their pre-retirement income, in order to maintain their lifestyle into retirement, then they need to understand the potential sources of retirement income available to them.
The following four pillars form the foundation of retirement income in Canada. Our discussion will focus primarily on the first three pillars, as these are the primary sources available to most individuals.
- Old Age Security (OAS) & Guaranteed Income Supplement (GIS)
- Canada and Quebec Pension Plan (CPP &QPP)
- Workplace retirement and savings plans
- Voluntary savings
1. Old Age Security (OAS) & Guaranteed Income Supplement (GIS)
OAS and GIS are designed to serve as the base level public income retirement replacement programs available to most Canadians. To qualify for OAS, an individual does not have to contribute to the program, but they must meet minimum age and residency qualifications, and the earliest the benefit commences is at age 65. OAS payments can be delayed for up to five years and this will result in an increase of the monthly pension by 36% at age 70. The maximum benefit payout of OAS in 2021 is $610/month and this is indexed quarterly to the Consumer Price Index (CPI). OAS is designed to replace 13.5% of the Canadian Average Industrial Wage (AIW), which was $57,839 in 2020.
In order to receive GIS, the individual must be in receipt of OAS and they must also demonstrate their inability to financially provide for themselves. There is a strict income and means test that they need to satisfy before they are entitled to any benefit payment. To qualify for the GIS, your income must be below $18,648 if you’re single, and if you have a spouse or common-law partner, your combined income must be below $24,624, if your partner receives the full OAS pension.
2. Canada and Quebec Pension Plan (CPP & QPP)
The second pillar of public income security retirement programs is CPP or QPP, and nearly all Canadians that participate in the paid labour market will contribute to one of these. The CPP or QPP is intended to provide the contributor with a retirement pension of 33% of their earned income and this is capped at Canada’s AIW. The normal age to start CPP is 65, however, an individual can start receiving CPP as early as age 60 (reduced 0.6% for each month before age 65 and this means a 36% reduction if CPP starts at age 60) or as late as age 70 (CPP is increased 0.7% each month of delay after age 65 and this means a 42% increase in CPP if it starts at age 70). The maximum 2021 CPP benefit payable, assuming the maximum 40 years of contributions and based on an earnings ceiling of $61,600, is $1,203.75/month. CPP rate increases are adjusted once a year using CPI. However, it is worth noting that the average CPP benefit payment in January 2021 was only $619.75/month.
3. Workplace Retirement and Savings Plans
Less than 40% of employees have access to a workplace pension plan according to Statistics Canada. Left to voluntary savings alone, Canadians will fall well short of what is required to have a comfortable retirement. Therefore, the third pillar of workplace retirement plans has become a critical retirement income source as government plans only replace approximately 46.5% of the AIW or $26,895 annually and that is if you qualify for the maximum benefits.
Why Provide a Workplace Pension or Retirement Savings Plan?
One reason is the impact of employee turnover. High employee turnover was seen as a growing epidemic for most employers, even before the onset of the pandemic, and this trend will likely continue even after the pandemic ends. Businesses often fail to recognize the significant impact of employee turnover in terms of escalating operational costs, lost productivity, and reduced business growth.
There are many reasons for employee turnover that include no opportunity for advancement, dissatisfaction with management, work environment and culture, or the absence of employee benefits, especially with rising health care costs and lack of funding for retirement benefits.
Canadians cannot rely purely on government retirement programs alone to provide adequate retirement income. When you add the fact that most Canadians do not have access to a workplace retirement plan, this just compounds the problem even more.
For businesses that do not currently provide a workplace retirement plan, there is an opportunity to reduce both employee turnover and operational costs. At the same time, there is also a great opportunity to attract the right type of talent and the ability to golden handcuff your existing employees to help drive your business forward. This can be achieved by providing a well-designed and cost-effective workplace retirement plan that not only complements your existing employee group benefits plan but helps strengthen your overall employee compensation strategy.
We would be pleased to discuss your specific situation with you to identify the best strategy with respect to your employee benefits and retirement programs. Should you have any questions on the above, please don’t hesitate to contact any member of our team.
ZLC Financial is one of the fastest growing advisor firms for employee benefits programs in Vancouver and we are fortunate to have the best people and resources to best serve our clients. We provide value to you by leveraging one of the most skilled benefits teams – over 350 years of experience within our team of 18 employee benefits and Group Retirement specialists. We have been working with businesses ranging from as few as 3 to as many as 75,000 plan members for the past 35 years.
Written By Nick Purewal,
Group Retirement Advisor
Disclaimer: This information is designed to educate and inform you of strategies and products currently available. The views (including any recommendations) expressed in this commentary are those of the author alone and are not necessarily those of ZLC Financial. This information is not to be construed as investment advice. It is for educational or information purposes only. It is not intended to provide legal, taxation or account advice; as each situation is different, please seek advice based on your specific circumstance. This commentary is not in any respect to be construed as an offer to sell or the solicitation of an offer to buy any securities.