In the summer of 2012, New Brunswick introduced a new form of pension plan — a shared-risk plan — based on a model originating in the Netherlands. Although elements of the plan bear some resemblance to jointly sponsored pension plans and multi-employer pension plans, the particular combination in New Brunswick is unique in Canada.
The shared-risk model enables a variety of arrangements that allow for a reduction in earned benefits and restrictions on the ability to accrue ancillary benefits. It also provides for elevated regulatory oversight and direction.
The changes provide for both the establishment of new shared-risk pension plans and the conversion of existing defined benefit (DB) pension plans to the new format.
A notable feature of the shared-risk framework is benefits that have already vested in members’ plans may now be reduced in certain circumstances, including plans that have converted to a shared-risk plan.
Multi-employer pension plans have long been able to reduce vested benefits in certain circumstances (other than in Quebec and, ironically, New Brunswick). Prior to this year, other than for multi-employer pension plans, only the federal jurisdiction permitted an amendment to reduce vested benefits, as supervised by the Office of the Superintendent of Financial Institutions (OSFI).
British Columbia enacted a new Pension Benefits Standards Act in May 2012 that is expected to come into force in 2013. It provides for the reduction of vested benefits for a negotiated cost plan or jointly sponsored plan, or under a target benefit provision.
Notable characteristics of New Brunswick’s plan
Funding policy: There must be a funding policy that is consented to by the superintendent of pensions and reviewed annually. The objective is to provide the rules under which the plan’s contributions and benefits are managed.
Investment policy: This is subject to the consent of the superintendent and must be reviewed annually.
Risk management goals and procedures: These must be established and reviewed annually, with the consent of the superintendent. Primary and secondary goals are set out in the regulations. The risk management procedures include a prescribed asset liability model and must be sufficient to test that the risk management goals will be met.
Escalated adjustments: Indexing may only be granted for prior periods of service, not for future periods, and only if permitted by the funding policy. This would, in essence, require that the funds be present in the plan before any indexing is actually granted and would require all indexing in a shared-risk pension plan be contingent indexing.
Open group funded ratio: This concept is introduced as a measure of benefit security. If the ratio falls below 100 per cent in two successive actuarial valuation reports, a funding deficit recovery plan must be implemented.
Disclosure: There are requirements for detailed disclosure by the administrator to members.
There is no statutory obligation to make all the contributions required to fund the benefits in a shared-risk pension plan. Instead, contributions are limited to what is required by the funding policy. A range of contribution obligations may be imposed on both employers and employees, but member contributions cannot exceed 50 per cent of total contributions.
Types of permitted administrators specified: A trustee, board of trustees or non-profit corporation may act as administrator. An employer cannot be the administrator of a shared-risk plan, unless it is a non-profit corporation. It appears the intent is to provide for shared governance responsibility between employers and employee groups.
Duties of a trustee: This may be intended as a change to the common law obligation of trustees to act in the exclusive interests of the beneficiaries. This suggests their sole obligation and future duty is to carry out the purposes of the shared-risk plan. Thus, the duties of a trustee will be determined based on how the shared-risk pension plan’s purposes are described in the plan text.
Minimum term of office: A minimum term of three years is prescribed, although it is not clear what would happen if a trustee resigns.
There are two categories of benefits that may be provided. A base benefit is defined as all of the benefits paid or payable, including vested ancillary benefits. Ancillary benefits are defined in the act.
Conversion from DB to shared-risk plan
Specific provision is made for the conversion of existing DB plans to a shared-risk arrangement, subject to certain restrictions.
Conversion restrictions: There are two forms of vested benefits that are protected under the DB model that will not be protected on conversion to a shared-risk pension plan. The first is indexing, not yet provided as of the conversion date. The second is any increase in pension benefits arising from future salary increases. Although the common law does not necessarily consider these forms of benefits to be vested, nonetheless, conversion would enable a final average plan to be converted to a career average plan with final average earnings frozen as of the conversion date. There are also time limits before which conversion from a shared-risk plan to a DB or defined contribution (DC) plan cannot occur.
Not void amendments: The amendments discussed above would ordinarily be void under the Pension Benefits Act. There are now specific provisions in the act that state these types of amendments, following conversion, will not be void.
Asset transfer: The administrator must transfer all plan assets to the shared-risk plan.
What’s missing: The conversion section does not stipulate who has the authority to convert a DB pension plan. Presumably that rests with the entity that has the authority to amend the DB pension plan.
Ability to modify benefits, contributions
The funding policy must include a funding deficit recovery plan and funding excess utilization plan that will determine what modifications may be made to contributions, base benefits and ancillary benefits. Non-vested ancillary benefits and certain future base benefits must be reduced before past base benefits.
If there is a conversion, the applicant for the conversion must file a copy of the conversion plan demonstrating compliance with the legislation, including using an asset liability model as prescribed by the regulations and any guidelines issued by the superintendent.
Valuation and review
The administrator must file an actuarial valuation report with the superintendent each year and annually review the funding policy, investment policy and risk management procedures. Confirmations of these reviews must also be filed, together with any changes in contributions or benefits. The administrator must also advise of any changes to the plan’s asset liability model.
For those plans that convert to the new arrangement, the shared-risk pension framework will potentially provide for a far more flexible approach to the funding and provision of benefits but, paradoxically, subject to far greater regulatory oversight and review than has traditionally been the case. Although the regulatory framework enables substantial flexibility, the legislation also allows employers and unions to negotiate more specific funding commitments and corresponding benefit protections if the parties choose to do so.
Ultimately, the extent of the variation of the New Brunswick model from the usual and developing forms of pension regulation in other Canadian jurisdictions and the results for plan members and sponsors will be determined over time.
Hugh Wright is a partner at the Halifax office of law firm McInnes Cooper. For more information, visit