Cost-cutting employers are hurting your retirement in ways that go beyond the steady retreat of pension plans paying money for life.
Postretirement health plans that help retirees pay medical and dental costs are also disappearing. This year's HR Trends survey by benefits consulting firm Morneau Shepell found that 41 per cent of employers are offering these plans today. A Conference Board of Canada survey in 2012 found that 51 per cent of employers offered post-retirement benefits.
The outlook is actually worse than these numbers suggest. In the Morneau survey, 24 per cent of respondents who offered these plans said they were looking for ways to stop. Also, some employers who claim to be offering postretirement benefits are doing little more than connecting retired workers to insurance products that replace company benefits.
Benefits paid to retirees are an overlooked example of how employers are backpedalling like mad from the commitment they once had to help their workers pay for retirement. This trend demands that we stop generalizing about how well-prepared people are for retirement. There are actually three different situations to consider – those with defined benefit (DB) pension plans and postretirement benefits, those who have second-rate pensions and postretirement benefits and those who have no help at all because they're self-employed or working temporary jobs.
Slot yourself into the appropriate group and develop your retirement savings plan accordingly. If you're in Group Three, no pension or post-retirement benefits, saving for the future has to be your top financial priority by far.
In the pension world, the big story today is the way companies are limiting access to their DB plans to current members and shunting new employees into defined-contribution plans. DB pensions are the gold standard – payments are pegged to your years of service and earnings, and last as long as you live. With DC plans, you and your employer contribute to an investing plan that leaves you with a lump-sum amount on retirement. It's up to you to convert that money into a stream of retirement income and make it last.
To see the demise of DB pension coverage in action, check out the latest round of contracts involving the Big Three auto makers and their unionized employees. The pattern is for current workers to keep their DB plans or a hybrid of DB and DC, while new hires get a DC plan.
Recent trends in postretirement benefits mirror what's happening with pensions. Employers that offer these benefits are either eliminating their plans altogether for future retirees, or capping the amount of money they kick in.
This can be in the form of a so-called health spending account, where employees get a set amount a year to use against their health or dental costs. Or it can be through a new type of plan that Morneau Shepell is developing where employers help employees buy their own health or life insurance.
The decline of both postretirement benefits and DB pensions is connected to business and demographic factors. Paul Sywulych, a partner at Morneau Shepell, said companies are increasingly averse to having liabilities on their books related to DB pensions and benefits that keep going after a worker retires.
These programs originated out of a view that companies should look after employees after they retire, Mr. Sywulych said. Today, longer lifespans are making it tough to continue these benefits. "Obligations which might have lasted an extra five or 10 years after retirement at one point are now lasting an extra 20 years after a person retires," he said.
Replacing traditional postretirement benefits are options such as:
- Conversion policies: Private coverage you buy through the insurers your company used for its group plan; Mr. Sywulych said these policies typically offer less coverage than the group plan.
- Health spending accounts: Retired workers get a set amount, say $1,000 a year, to cover health-related costs.
- Morneau Shepell’s myFuture: Employers provide retirees with access to health and life insurance coverage options, and possibly contributions toward the cost of premiums.
As with any insurance, you have to evaluate coverage offered by conversion policies and the likes of MyFuture by comparing premiums and the potential costs of paying health and dental bills out of pocket. I'll try to look at these costs in a future column to help you better make this judgment.
In the meantime, be aware of trends in the workplace affecting pensions and postretirement benefits. The pressure on a lot of people to save harder for retirement saving is growing.