Finding middle ground for Canada’s pension plans

Panel debates pros and cons of Bill C-27 and target benefit plans
By Marcel Vander Wier
|Canadian HR Reporter|Last Updated: 01/02/2018
Bill Morneau
Finance Minister Bill Morneau has been in the spotlight recently with suggestions of a conflict of interest as the implementation of target benefit plans could benefit his former firm, Morneau Shepell. Credit: Chris Wattie (Reuters)

With Canadian employers continuing to shift away from defined benefit (DB) pension plans, Bill C-27, An Act to Amend the Pension Benefits Standards Act, is looking to establish a framework for target benefit pensions in the federal private sector and Crown corporations.

If put into law, the bill would allow banks, airlines and telecommunication companies to establish target benefit plans, as well as permit the conversion of DB plans to the target benefit option.

The world of pensions is shifting and needs to be addressed, said Lynn Hemmings, senior chief of the financial sector policy branch of the Department of Finance Canada.

With a continual shift from DB plans to defined contribution (DC) options, the federal government cannot simply leave options as they are, she said.

“I’m not sure that’s the outcome that we want,” said Hemmings, speaking at a pension conference by Lancaster House in Toronto in November.

The bill comes into play at a time when interest rates are experiencing an extended low, alongside market volatility and increased life expectancies for workers — all of which threaten the sustainability of DB plans, said Hemmings.

“The drivers for this are really around the sustainability challenges that have arisen since 2009.”

The objective of the target benefit framework is to provide a lifetime pension that pools market risk and protects retirees against the risk of outliving savings, she said. It promotes plan sustainability by allowing benefits and contributions to be adjusted in response to the plan’s funded status.

Any benefit conversion requires potential risk and rewards to be clearly communicated, followed by individual informed consent, she said.

“People will not be with a gun held to their head,” said Hemmings, noting that the bill is a broad stroke.

“If we start creating carve-outs, we could be undermining the balance that currently exists between the rights of employers and employees.”

‘Best features of DB, DC plans’

From an employer’s point of view, target benefits provide a middle ground between DB and DC plans at a time when many organizations are freezing DB contributions, said Kim Ozubko, pension counsel at Miller Thomson in Toronto, speaking on the panel.

Many companies are struggling to maintain DB plans, and have shifted to DC plans, group RRSPs or thrift savings plans (TSPs), she said. “Many employers are quite simply no longer interested in the risk, the instability, the uncertain costs associated with DB plans.”

It’s high time the country’s public and private sectors looked at alternate benefit options, she said.

“The DB ship has already sailed and we need to look at other retirement saving options for employees if we are serious about providing retirement savings as part of a benefit package.”

And while target benefit plans are relatively new in the single-employer context, they may provide an answer in the shifting pension landscape, said Ozubko.

“They allow the financial risk to be shared between the polar extremes of the DC plans — which have uncertain benefits but have certain contribution requirements — and DB plans, which have relatively certain benefits and uncertain contribution requirements.”

Yet while employers have shown interest in the model, many are still taking a conservative approach to target benefits, she said.

“The consent provisions may make it difficult for some employers to converge or transfer DB to DC. I, certainly from the clients I speak to, see interest in target benefit plans, but I think many (employers) are taking a wait-and-see approach at this point.”

‘This is an unprincipled piece of legislation’

But from an employee point of view, the bill reverses pension promises and allows decisions such as Sears’ to become legal, said Mark Janson, senior researcher at the Canadian Union of Public Employees (CUPE).

(The retailer’s underfunded pension plan could see members receiving significantly less in benefits.)

In essence, the bill would allow a promised pension to retroactively become an unpromised pension, he said.

“Under C-27, already earned defined benefit promises that an employer has made to a worker, for work they have already done, can be overnight converted into target benefits, which do not hold an employer-backed promise to pay a specific amount in retirement,” said Janson, speaking at the panel.

“They are not legally binding and can be reduced without limits.”

It’s deal-breaking, he said.

“To us, this is an unprincipled piece of this legislation and has been the focus of our opposition... We just think that this is wrong for an employer to get such a windfall in one round of bargaining. An employer can effectively recoup compensation from 10, 20, 30 years of past bargaining overnight, if this legislation passes. Overnight, it shifts the bargaining goalposts far down the field in favour of the employer.”

It is a widely held view that employers need to make good on their promises to workers, said Janson.

“We see this right now in the public debate around Sears,” he said. “The public is outraged about Sears and the fact that these workers and retirees are not getting what was promised to them.”

This is a massive shift in our pension system, said Janson.

“The point of pension regulation law was to better protect pension promises. This goes the other way… Employers who have a DB plan can effectively get what they want, shifting risk to workers.”

The opposition is not to traditional target benefit plans in theory, but rather the threat it poses to workers in the single-employer context, said Laura Brownell, staff representative for pensions at the Society of Energy Professionals, speaking at the panel.

“If enacted, it will support a precedent that threatens the earned pension benefits of thousands of Canadian workers,” she said. “Single-employer target plans put accrued benefits at risk in the context of CCAA (Companies’ Creditors Arrangement Act) restructuring.”

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