Brace for Re-entry – What it Means for Pension Plans when Retirees Return to Work

 

A growing number of Canadian retirees are deciding to return to work. Improved health means more people over 55 are physically and mentally capable of continuing to work than in the past. Some are lured back by employers desperate for workers or by the satisfaction they derived from work. For others, it’s an economic imperative dictated by inadequate retirement income, rising inflation, or both.

A Statistics Canada study from 2014 found that 60% of people who exited a job aged 55-59 were re-employed within 10 years, 44% aged 60-64 and 16% aged 65 or more.

For employers and employees, a return to work can be a good thing, a solution to a problem. But it nonetheless complicates the administration of pension plans— and even more so with the passage in 2021 of Bill C-30. This piece of federal legislation amended the Income Tax Act such that employers of people who retired, began collecting a pension from the plan’s defined benefit (DB) provision, and then returned to work can no longer submit contributions to a DB provision of a Specified Multi-Employer Pension Plan (SMEP). Employers will also be prohibited from contributing on behalf of an employee after the end of the year in which the member attained 71 years of age.

Depending on plan provisions, members who return to work and are under the age of 71 might need to suspend their pension payments in order to earn additional pension credits. That is unless their Plan allows for contributions to be re-directed to an arrangement other than a Defined-Benefit Plan. For example, a defined contribution plan, money purchase arrangement, associated health and wellness plan or rebate to the employee and employer).

Once members turn 71, they must re-commence their pension payments if they haven’t already. Employers are prohibited from submitting contributions once a member turns age 71.

Any new collective agreements must take into account these changes, with wording on how returned and older employee, and employer contributions will be handled henceforward, and plan administrators need to come up with equitable alternative arrangements for affected employees under existing agreements.

When coming up with new provisions, employers must consider their priorities: Are they having difficulty retaining employees? Do they want to keep people working or strive for a younger workforce? Plan sponsors should consider the Plan’s financial position, what early retirement subsidies they currently offer, the number of employees expected to take advantage of these provisions, and how returning to work affects retirees.

Administrators might consider imposing a minimum time threshold for returned employees to re-enter the plan, as well as a minimum threshold after returnees stop working (for the second time) for pension benefits to be reinstated. They must also grapple with how the benefits are to be recalculated taking into consideration what assumptions to use, any guarantee periods offered, marital status changes, and whether they get adjusted to reflect the extended years of service.

In reviewing return-to-work policies, plan administrators may need to consider amending the terms of early retirement subsidies, imposing limits on the number of times an employee can retire, and creating clear guidelines for re-calculating members’ benefits. And then monitor how those policy changes play out in the real world.