Retirement plans vs salary increases: Benefits for plan sponsors and plan members

Many organizations understand the value of a group retirement plan as part of total employee compensation package; however, employees tend to focus only on their take home pay and would prefer a pay raise over other compensation enhancements. This presents a challenge for organizations in balancing what makes sense in the long term while rewarding employees in the short term. Both needs can be met by directing part of a salary increase to a pension plan or a DPSP.

 

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Salary increases don’t materially increase take-home pay

After taxes, an average wage increase of 2-3% results in a modest increase in take-home pay.

Sample raise and corresponding increase in take-home pay

For example, an individual who makes $50,000 annually, receives a 2.5% salary increase for a new salary of $51,250. Assuming there are no changes to federal or provincial taxes or program deductions, the chart below shows their weekly increase in pay in several provinces.

 

British Columbia

Manitoba

Ontario

Québec

Take-home pay before increase

$ 39,825

$37,531

$39,210

$35,561

Take-home pay after increase

$40,654

$38,304

$40,024

$36,268

Annual increase in take-home pay

$829

$773

$814

$707

Weekly increase in take-home pay

$14,03

$13.08

$13.61

$11.56

Make compensation more effective for everyone

Benefits for employers

Depending on the province, salary increases can generate an annual increase in payroll taxes for the organization, e.g., employment insurance, EHT, CPP etc. Contributions to a DCPP or a DPSP allow the employer to bypass these payroll taxes. Even re-allocating as little as 1% could save several thousand dollars per year in payroll costs.

In today’s environment, organizations are looking to attract and retain top talent while minimizing overall costs. Contributing to a DCPP or DPSP plan can help meet these objectives.

Benefits for employees

An organization’s contribution to the DCPP or DPSP is a meaningful commitment to the long-term financial well-being of their employees. This investment helps employees save and prepare for their retirement and creates a positive culture. Employees who participate in a company-sponsored retirement plan tend to be happier with their job, more productive at work, and less likely to seek employment elsewhere.

For many employees, it’s easier to contribute a small amount from each pay rather than a large lump sum at the end of the year. The ease of making contributions and the prospect of achieving steady returns from well-diversified pension-type funds to grow a pool of savings over time is a significant benefit to employees.

Group retirement plans tend to have low investment management fees which results in more savings at retirement that can be used to finance months or years of additional income. Automatic payroll deduction at source allows money to be put aside without a major impact on lifestyle.

There’s also the benefit of immediate tax relief. The tax that the employer is required to deduct at source is only calculated after deducting an employee's contributions to a retirement plan, thereby maximizing the value of their pay.

It’s win-win

Education and regular communication will help overcome the general bias toward salary increases. Offering a DCPP or DPSP to employees has many advantages and is often more effective than a salary increase. It’s a win-win scenario for the organization and its employees.

Written by Chris Walker, Vice President, Group Retirement Solutions and Catherine Paquin, Consultant, Group Retirement Solutions