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Why SERPs are Increasingly Popular and Rectify Limits to Standard Executive Compensation Plans

Posted under: DB, RCA, SERP

SERPs offer companies the opportunity to attract and retain top talent by addressing the limits to standard executive retirement plans

Laura Davis

January 30th, 2025

Many corporate executives today are enrolled in executive retirement plans that fail to provide them sufficient retirement income based on their earnings due to limits within their standard retirement plans.  Supplemental Executive Retirement Plans (#SERPs) are popular executive #compensation strategies that were constructed to address this issue.  This article will address the questions of who SERPs are ideal for and how they work.

SERPs are ideal for:

  • Senior executives or key employees whose income exceeds the thresholds of registered plans.
  • Organizations looking to attract, retain, and reward top-tier talent.

How SERPs work:

A 70% total replacement ratio is a typical value used by financial planners and actuaries for retirees to maintain a similar standard of living in retirement.  This means that in retirement, combined retirement savings should aim to replicate 70% of your pre-retirement income on an annual basis.  Registered plans often will target this (generally in combination with CPP and OAS) with 35 years of service with the company. 

However, earnings limits for registered plans means this target is often unreachable for high-income earners under a traditional Defined Contribution (#DC) or Defined Benefit (DB) plan.  This leaves executives and high-income earners in Canada to make up the difference in required savings outside of their company’s pension plan or their Registered Retirement Savings Plan (RRSP). 

In today’s competitive hiring market for executives in Canada, offering a #SERP can help attract, retain and reward executives, while helping bridge the gap between their retirement needs and a registered plan benefits. 

A SERP is usually targeted at high-income earnings.  It can be a standalone plan or sit on top of a registered plan to top-up the executive without the earning restrictions that would apply to the base plan.  This makes it more attainable to meet the executive’s income needs in retirement. 

A SERP also offers more flexibility than a registered plan when it comes to plan design and conditions such as vesting.  This gives the company an opportunity to design the SERP to meet their internal goals and increase retention with their executive team.  There are two ways to fund a SERP:

  • Funded: The employer funds the SERP during each funding period.  The SERP funding vehicle is typically a Retirement Compensation Arrangement (#RCA).
  • Unfunded
    • Unfunded Unsecured: The employer earmarks a promised amount, which grows as a liability on their balance sheet, before paying the amount to the employee at a later date, deferring cashflow until paying the benefit at termination or retirement.  No assets are set aside to guarantee payment to the employee in the event of default or insolvency of the employer.
    • Unfunded Secured:  Similar to above, except a Letter of Credit is obtained to provide security for the SERP entitlement in the event of default or insolvency of the employer.  The cashflow for the benefit is deferred until termination or retirement.

Under either funding approach, the executive does not receive the funds or pay income tax until in retirement, when they may be at a lower #tax bracket and capitalize on the tax savings.

Use Case: How a SERP Benefits Sarah, a Senior Executive from XYZ Corp

  • Situation: Sarah earns $350,000 annually, significantly exceeding RRSP and RPP contribution limits. She’s concerned about maintaining her lifestyle in retirement.  XYZ Corp would also like to improve their talent attraction and retention strategy.
  • Solution: XYZ Corp. implements a SERP for Sarah, promising 20% of her final average salary, payable after retirement for the same number of years as she accrues in credited service to a maximum of 20 years.  This benefit is pre-funded and paid out to Sarah through a Retirement Compensation Arrangement (RCA) during her retirement.
  • Outcome: Over her 15-year tenure, Sarah earns substantial supplemental retirement income through the SERP. This plan bridges the gap left by registered plans and ensures she’s financially secure in retirement.  It also provides a retention incentive until she reaches the targeted 15-year tenure, without unduly penalizing Sarah with a full loss of entitlement, or rewarding her with a full accrual of entitlement, if she chooses to retire earlier than expected.

SERPs can be a beneficial addition to your company’s retirement offerings, help differentiate your benefit suite, help incentivize and retain your top talent and do so in a tax effective manner to the company and the executive.

To see how a SERP can benefit you or your organization, please contact GBL.

www.gblinc.ca

Founded in 1995, GBL is a leading provider of retirement, health, and cross-border solutions for business owners, and corporate pension administration across Canada. With offices in Calgary and Toronto, we have served 7,000+ clients, have 3,000+ Financial/Investment Advisors in our network, actively manage 2,000+ IPPs, RCAs, and SERPs.  We have created 1,000+ HBPs and 3,000+ FMVs. We’re known for our industry leading client service and administration, as well as our top-notch actuarial group. Contact us today at  [email protected] or 403.249.1820 and follow us on LinkedIn to learn how we can help Build Your Future.

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