Watson Wyatt recently conducted a SERP survey to quantify the prevalence and assess the design features of SERPs in the Canadian market. Later this year, Watson Wyatt will publish a similar survey for the U.S.

Canada's Income Tax Act (ITA) limits, frozen for the past 25 years for many plans, originally affected a relatively small number of highly paid senior executives. But today, many Canadian employees earning as little as C$65,000 will not be able to rely on their company-sponsored pension plans to provide them with adequate retirement income. And plan sponsors are finding themselves in a predicament as they look for ways to fulfill the pension promise.

Consider the following example: An organization has a defined benefit (DB) registered pension plan with a 2 percent formula. The executive in our example is retiring after 35 years, and was earning $125,000, the average salary for a lower-level executive. Ideally, his pension would replace 70 percent of the final average salary upon retirement, amounting to annual pension income of $87,500 ($125,000 x 2% x 35). The sad reality, however, is that this executive may receive a pension income of only $60,278 per year because of government limitations.

According to Watson Wyatt's 2000 Supplemental Employee Retirement Plan survey of more than 430 organizations across all industries, one of every six salaried employees in Canada is affected by these government limitations. This is up from one in eight just two years ago, and it is expected to rise to one in four by 2005. As inflation and salaries continue to rise and the government fails to address this issue, the situation will only worsen.

SERPs are becoming a popular way to ease the impact of the limits imposed by the ITA. More than half (52 percent) of organizations now offer a SERP, compared with 46 percent in 1998, a 13 percent relative increase. An additional 5 percent of survey participants indicate that they are considering implementing a SERP in the next 12 months.

The troubling news is that many organizations do not understand how SERPs work and how they can benefit from them. Among those organizations without a SERP, more than 25 percent said they don't offer one because they didn't know they could or didn't know how to proceed; 42 percent cited cost constraints, up from 29 percent in 1998.

The good news is that organizations with SERPs value them as an attraction and retention tool. More than one-third (37 percent) cover all employees affected by the tax limits, and almost one-fifth said they are likely to broaden the eligibility for employees covered by their SERP over the next two years.

Employee benefits have never been so critical to an organization's success. Employers seeking to ensure that their organizations are well positioned to attract and retain key talent cannot overlook the value of SERPs as a competitive necessity.