Benefits in Canada

Economic and demographic pressures are forcing Canada’s employers to rethink their benefits provision, with a growing move towards defined contribution pensions and flex, says Sarah Coles

An ageing workforce, stratospheric healthcare inflation, a sliding stock market and an impending recession are all having an impact on the provision of benefits in Canada, with the country’s generous defined benefit (DB) pension schemes, healthcare and post-retirement packages all under pressure.

One area that has started to change is pensions. Canada has a long-established system based on defined benefits, and 80% of plans fall into this bracket. But the schemes have been hit hard by the poor performance of the stock market. Joseph Ricciuti, director of client solutions, group and healthcare for Watson Wyatt in Canada, says: “There is a major issue with under-funded defined benefit pension plans at the moment.”

This echoes the problems UK plan sponsors suffered in Britain’s last downturn, with over-exposure to equities and serious deficits. And there is every chance the end result will be the same, with a wholesale move to defined contribution (DC) pension schemes.

There is some evidence that a shift to DC has begun in Canada, but it has not been as swift as elsewhere although with the stock market downturn this could change going forward. Ofelia Isabel, a principal in Towers Perrin’s Toronto office, says: “The trend here hasn’t been as quick or pronounced as in the US or UK.”

Another factor influencing the shift to DC is regulatory change, which could include proposals to raise the cap on contributions to DC schemes, which is currently set at 18% of salary.”There are elements of the system that don’t work at the moment,” adds Isabel. “For example, the amount that can be tax sheltered is about a third of that in the UK, so limits are hit relatively quickly.”

Healthcare is also under pressure in Canada. Provision has been shaped by the country’s commitment to free basic healthcare for all. As a result, by law, the private sector is only allowed to offer services that are unavailable in the public system, including outpatient prescriptions, dental and optical care, provision of private rooms, and services such as physiotherapy.

The cost of this provision is rising. For example, premiums for group medical cover, which is provided by 65% of employers, have been on the up for more than 10 years, growing by about 11% a year. “Some premium increases are a result of new drugs; others are the government offloading more responsibilities to employers,” says Isabel.

As a result, employers are trying to control costs in various ways and making cuts where possible. “Traditionally, you had post-retirement benefits, but employers are trying to get out of these,” says Isabel. Telecommunications giant Bell Canada, for example, announced in 2007 that it would be phasing out all post-retirement benefits by 2012.

Another avenue employers are exploring to help manage costs is flexible healthcare schemes, says Isabel. “They say they will pay X% of salary as basic healthcare and employees can choose whether they want to use the remainder of their allowance for enhanced cover or spousal cover or dental.”

This method of using flexibility to control costs is becoming more common across the board. Ricciuti says about 33% of employers now offer some sort of flexibility within benefits.

Flex has the added advantage of enabling employers to appeal to an increasingly diverse workforce, says Isabel. “There is a need to segment employees and offer benefits that appeal to generation Y as well as the baby boomers. In addition, Canada is a destination of choice for immigration, so plans need to cover diverse cultures, too.”

The country also has an ageing population, which has affected the provision of benefits. “We are ageing very quickly,” says Isabel. “There is a lot of focus on keeping older workers for longer, so employers are looking at things such as phased retirement, and are getting rid of early retirement subsidies.” Ricciuti says this is also leading to increased interest in benefits such as eldercare and long-term care.

But employers are having to balance the need to provide benefits that suit the workforce with the pressure to manage costs more tightly, says Ricciuti. “The economy is teetering on the edge of recession, so employers are focusing on costs.”

But with benefits remaining important in helping to attract key talent in this market, any dramatic changes to the overall offering are unlikely.

If you read nothing else, read this…

– 80% of pension schemes are defined benefit, but there is a growing trend towards defined contribution (DC) plans.

– DC plans could be boosted by new legislation allowing, for example, higher contributions.

– Private healthcare is allowed only as a top-up for the state system, not a replacement.

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– The rising cost of medical premiums is persuading employers to introduce flexible healthcare with fixed contributions and to consider dropping post-retirement benefits.

– Employers are also turning to flexible benefits to control costs and provide perks that appeal to a diverse workforce.