Major tweaks proposed for pensions

Measures enhance protection for plan members, modernize investment rules
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 11/15/2009

The federal government has proposed several changes for the seven per cent of pension plans that are federally regulated — which could also have implications for provincial plans.

The scope of the proposed changes is surprising and Ottawa should be commended for taking the lead in reforming the private pension system, said Jeffrey Sommers, a partner with law firm Blakes in Toronto.

“There was clearly an attempt at balancing interests here,” he said. “Generally these things are favourable — many of the proposals here are things that plans sponsors were advocating.”

The measures are intended to provide enhanced protection for plan members, reduce funding volatility for defined benefit (DB) plans, improve the framework for defined contribution plans and modernize rules for pension fund investments.

“We are proposing a balanced package of measures for the benefit of pension plan sponsors, plan members and retirees,” said Minister of Finance Jim Flaherty.

The government plans to restrict an employer’s ability to take a contribution holiday unless a five-per-cent funding cushion remains. And sponsors will be required to file an annual valuation report — instead of every three years for a plan in surplus — to provide a more recent picture of the funded status of a plan.

“The practice of taking contribution holidays was widespread in the past and has been a contributing factor towards the underfunding of pension plans during the past several years,” said the government.

While the change is more restrictive than the rules are now, it is not an unreasonable requirement, said Sommers. However, the annual actuarial valuation will be an additional administrative cost for employers, he said.

Also attracting attention is the proposal requiring employers to fully fund pension benefits on plan termination. Any solvency deficit that exists at the time of termination will have to be amortized in equal payments over no more than five years

“This measure will improve benefit security for members by eliminating the possibility, which exists under current rules, that a pension plan could be voluntarily terminated at a time when plan assets are not sufficient to pay the full amount of promised benefits,” said the government.

But it’s not a new idea and is consistent with other jurisdictions in Canada, said Sommers. While the proposal comes across as protecting plan members, in reality it would be very unusual for an employer to terminate a pension plan in order to walk away from a deficit.

“As an employer, you have other potential claims for breach of contract or constructive dismissal,” he said. “For a solvent employer, which seems to be what they were intending — to prevent a voluntary termination of a plan that’s in deficit and an employer walking away from its obligations — that would be a very unusual circumstance.”

Nortel workers still near end of line

The government has gone out of its way to state if an employer terminates a plan with a deficit, it is now responsible for funding the deficit, said Sommers. But that obligation is an unsecured debt, so while Nortel retirees and employees, for example, have been calling for greater priority over other creditors, “this specifically says otherwise,” he said.

“That obligation is an unsecured debt and will not rank over the other creditors of the employer.”

While most people feel sympathy for Nortel employees, “there’s a very long list of people who lost a lot of money last year and there’s just not the resources available to go and make them all whole,” said Malcolm Hamilton, a worldwide partner with HR consulting firm Mercer in Toronto. “So that’s just a problem that’s best avoided in the future.”

In addition, the government’s intention to increase to 25 per cent from 10 per cent the pension surplus threshold — which applies both to federally and provincially regulated DB plans — might be intended to “provide more flexibility to plan sponsors” but it’s not a rainy day fund, said Hamilton.

“What they haven’t done is anything that will make employers confident that if they put surplus moneys into their pension fund, and it turns out the moneys aren’t needed, there’s no guarantee they’re going to be able to recover them,” he said.

“I would expect relatively few employers to take advantage of this opportunity to stockpile this surplus because it’s, in essence, putting money at risk.”

In addition, the government is recommending plan sponsors be required to provide greater detail in annual member statements, including the date of the solvency ratio reported along with the date of the next valuation report, the total assets and liabilities of a plan, a summary of the plan’s investment allocation and total employer contributions made for the reporting year.

Canada’s finance ministers plan to meet in Whitehorse in December to discuss pension reform — and Ontario’s Dwight Duncan recently announced enhanced protection for pension plans in the province, through a two-stage process starting in November — but it’s unlikely a definitive announcement will come out of that meeting, said Hamilton.

“Really, that’s the point at which we see whether the federal and provincial governments have a common view as to what needs to be done.”

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