Employers want easier funding rules and pension law harmonization across Canada
Canada is heading towards two pension realities: strong defined benefit pension plans for public-sector workers, and defined contribution pension plans for private-sector employees. That’s if private-sector workers have a pension at all.
That’s according to Elaine Noel-Bentley, senior director of total compensation at Calgary-headquartered Petro-Canada, and a member of the board of directors of the Association of Canadian Pension Management.
The problem is that governments and regulators are making it unattractive for companies to offer DB pensions, she says. While public-sector unions can feel secure that employers won’t try to drop DB plans, plan sponsors in the private sector are looking at options.
When it comes to the creation of new pension plans, Canada has seen a modest number of new DC plans, and very few DBs, says Noel-Bentley. Mostly companies are offering Group RRSPs. She stresses DCs aren’t necessarily better or worse than DBs; the point is that government, regulatory and court decisions are eliminating DBs as an option.
The pressure on DB plans comes from a number of factors. Stock market investments no longer reap the returns of a decade ago. And while the investment situation has improved recently, low interest rates are expected to continue to have a negative impact on plan solvency.
Sponsors are also concerned that funding requirements are too strict, and are calling for changes, including longer solvency deficit amortization periods.
Another bone of contention is plan surpluses. In 2004, the Supreme Court of Canada made a ruling on surplus division that favours employees during plan windups that has had a chilling effect on sponsors. Sponsors also want wider access to surpluses in general.
As well, corporate pension plan sponsors have long complained about Canada’s jurisdictional patchwork of federal and provincial pension legislation. This makes it very difficult for national employers that have to understand policies and requirements in every province they operate in. Court decisions can even vary according to the jurisdiction and statute in effect, bemoans Noel-Bentley.
While regulators and bureaucrats in the public service are receptive to stakeholder concerns about pension barriers, at the end of the day it’s politicians who need to act, she says. And that hasn’t happened despite years of complaining about the patchwork system.
CFOs lay it on the line
Earlier this year the chief financial officers of five major federally regulated employers responded to a federal Department of Finance pension plan consultation process with a plea for regulatory changes within the Pension Benefits Standards Act that would improve the viability of DB plans.
The joint submission, by Bell Canada, the Canadian National Railway, the Canadian Pacific Railway, Manitoba Telecom Services and NAV Canada, calls for changes to pension fund solvency regulations, including lengthening the solvency deficit amortization period from its current five-year period to 10 or 15 years, and allowing letters of credit and funds held in trust in lieu of solvency contributions. And there are concerns about the Canadian Institute of Actuaries’ standards for determining solvency liabilities.
The CFOs also took aim at the Supreme Court’s Monsanto decision and the resulting inability of sponsors to apply surpluses to their pension funding planning. “There exists a major imbalance between risk and reward…While the plan sponsor is responsible for funding any deficits, the rewards for the plan sponsor for taking pension risk are uncertain and unappealing…Surplus assets are not freely available to the plan sponsor on an ongoing basis or upon plan windup.”
According to the CFOs, the upshot of all these “barriers” is a disincentive to offer DB plans.
“When we encounter asymmetry between risk and reward in our day-to-day business, we invariably choose to minimize or avoid such an investment or we divest. This common-sense business approach is being applied increasingly these days to the funding and management of defined benefit plans,” they write.
DC plans have their concerns, too
At Petro-Canada, Noel-Bentley deals with a grandfathered DB plan and a DC plan for employees who joined after 1996. The majority of staff are now part of the DC plan.
For the DB plan, Petro-Canada still has to manage funding, but Noel-Bentley says the time requirements are not outrageous.
With the DC plan, the most important task is employee communications, she says.
When Petro-Canada first adopted a DC plan in ’96 it set up an employee pension advisory committee. Eight to 10 employees from across the company and across the country sit on the committee. They meet a few times a year, not to make policy decisions, but to help develop Petro-Canada’s communication strategy.
The concern is that without proper DC plan communication and education, employees will mismanage their retirement and come after the plan sponsor for failing to provide them the information they need to adequately plan for the future.
But not everyone is approaching member communication and education with due diligence.
Fred Pamenter, managing partner with Pamenter, Pamenter, Brezer and Deganis, a Toronto-based HR consulting firm, has more than 25 years’ experience sitting on pension trustee boards. He’s concerned not enough employers are taking the threat of employee litigation over poor DC returns seriously enough. Not only do employers have a responsibility to ensure appropriate education and communication, they must be wary of giving advice.
“It can be a fine line between education and advice,” Pamenter says. “As an employer you shouldn’t give advice, you’re not qualified to, and if you do you are building a liability for yourself. Some employers are sufficiently aware of this, others are not.
“We haven’t seen the end of this. The fallout of DC plan lawsuits will start when the members start retiring.”
As it turns out DC plans are not a fail-safe solution for sponsors looking to get off the DB treadmill.
Only one in 232 firms tracked bailed out completely
Towers Perrin surveyed 232 plan sponsors, examining the years 2000 though 2004. During the five-year period, 10 per cent of DB plan sponsors shifted to DC plans. Another 13 per cent altered their DB plans from a “pure DB” plan design to plans that combined DB and DC, or give greater flexibility within a DB plan.
Seventy-seven per cent of sponsors in the survey stayed with their “pure” DB plans. Only one plan sponsor dropped its plan completely.
Interestingly, six per cent of sponsors that previously shifted from DB to DC switched back to DB.
“Is DC necessarily the perfect design? The answer is ‘apparently not,’” says Ian Genno, principal with Towers Perrin in Toronto. “I wouldn’t say it’s a trend, but it challenges the notion that DC is the perfect end-state.”
New employers are still creating pension plans, says Genno. For the most part this represents companies entering the Canadian market that are looking to provide competitive compensation packages.
As for employers that already have plans?
“Once they offer retirement benefits it’s hard to move away from that,” says Priscilla Healy, legal counsel with Mississauga, Ont.-based law firm Pallett Valo and a retired Towers Perrin principal.
But sponsors want change, and the issue of surpluses is a big part of that. It’s not just a question of what to do with a surplus during a full or partial plan windup, she notes.
“Surplus issues come up in mergers, acquisitions, asset transfers, contribution holidays and benefit improvements for members. The wording in some plans has resulted in sponsors not even being able to pay the plan administrator’s fee from plan revenue.”
Employers feel they can’t even use the surplus for legitimate reasons to benefit members, says Genno. Some employers respond by looking to put as little into the plan as possible.
“As funding rules have become stricter employers look for ways to reduce cash contributions. They look at riskier investments that are less prudent.”
This contribute-less, invest-more-aggressively response can invariably lead to more losses. The upshot is that stricter funding and regulatory control, combined with court decisions unfavourable to sponsors, lead to a weaker pension system instead of the intended fund security, Genno says.
Is there a solution?
CAPSA’s long and winding road
The Canadian Association of Pension Supervisory Authorities (CAPSA) brings together the country’s pension regulators with a mandate to make the pension system more efficient and effective. For the past five years, CAPSA has been working on a “model pension law” that harmonizes pension legislation across Canada.
In January 2004, CAPSA released a consultation paper on regulatory principles for a model pension law. That was followed by six months of consultations, which resulted in about 50 principles being divided into three categories:
*less contentious items (representing plan administration and basic entitlement standards);
*issues that need some more thought (such as funding); and
*contentious issues (such as how to handle surpluses).
The Task Force on Common Pension Standards was set up to develop the details for laws and regulations for the first, non-contentious category. In the second category, a discussion paper on funding principles was released this June. Contentious issues still need to be dealt with.
Nurez Jiwani, director of the regulatory co-ordination branch of the Financial Services Commission of Ontario and chair of the Task Force on Common Pension Standards, says work on the non-contentious issues will likely be finished and presented to CAPSA in the fall of 2006.
“My guess is we would likely have to consult with industry at that stage,” says Jiwani.
And CAPSA must still determine if it will present its work on non-contentious issues to governments separately, or wait until work on all three categories is completed. “I think a good time to discuss that is next fall when we finish category one,” Jiwani says.
With a number of issues to address and steps to be taken, a guess at when governments will have a reform package in front of them is not easy to come by, even for CAPSA insiders. If and when governments will act to adopt model pension legislation once it is presented is even more uncertain.
The need for political consensus across jurisdictions is the “Canadian disease,” notes Healy. Bringing Canada’s politicians together on any issue, be it pensions or health care, is much like “herding tigers,” she says.
Pension plan sponsors had it good for a long time, when stock market investments made it easy for plans to grow in value. But those days are over. Pension law reform will help the viability of DB plans. The question is when.
That’s according to Elaine Noel-Bentley, senior director of total compensation at Calgary-headquartered Petro-Canada, and a member of the board of directors of the Association of Canadian Pension Management.
The problem is that governments and regulators are making it unattractive for companies to offer DB pensions, she says. While public-sector unions can feel secure that employers won’t try to drop DB plans, plan sponsors in the private sector are looking at options.
When it comes to the creation of new pension plans, Canada has seen a modest number of new DC plans, and very few DBs, says Noel-Bentley. Mostly companies are offering Group RRSPs. She stresses DCs aren’t necessarily better or worse than DBs; the point is that government, regulatory and court decisions are eliminating DBs as an option.
The pressure on DB plans comes from a number of factors. Stock market investments no longer reap the returns of a decade ago. And while the investment situation has improved recently, low interest rates are expected to continue to have a negative impact on plan solvency.
Sponsors are also concerned that funding requirements are too strict, and are calling for changes, including longer solvency deficit amortization periods.
Another bone of contention is plan surpluses. In 2004, the Supreme Court of Canada made a ruling on surplus division that favours employees during plan windups that has had a chilling effect on sponsors. Sponsors also want wider access to surpluses in general.
As well, corporate pension plan sponsors have long complained about Canada’s jurisdictional patchwork of federal and provincial pension legislation. This makes it very difficult for national employers that have to understand policies and requirements in every province they operate in. Court decisions can even vary according to the jurisdiction and statute in effect, bemoans Noel-Bentley.
While regulators and bureaucrats in the public service are receptive to stakeholder concerns about pension barriers, at the end of the day it’s politicians who need to act, she says. And that hasn’t happened despite years of complaining about the patchwork system.
CFOs lay it on the line
Earlier this year the chief financial officers of five major federally regulated employers responded to a federal Department of Finance pension plan consultation process with a plea for regulatory changes within the Pension Benefits Standards Act that would improve the viability of DB plans.
The joint submission, by Bell Canada, the Canadian National Railway, the Canadian Pacific Railway, Manitoba Telecom Services and NAV Canada, calls for changes to pension fund solvency regulations, including lengthening the solvency deficit amortization period from its current five-year period to 10 or 15 years, and allowing letters of credit and funds held in trust in lieu of solvency contributions. And there are concerns about the Canadian Institute of Actuaries’ standards for determining solvency liabilities.
The CFOs also took aim at the Supreme Court’s Monsanto decision and the resulting inability of sponsors to apply surpluses to their pension funding planning. “There exists a major imbalance between risk and reward…While the plan sponsor is responsible for funding any deficits, the rewards for the plan sponsor for taking pension risk are uncertain and unappealing…Surplus assets are not freely available to the plan sponsor on an ongoing basis or upon plan windup.”
According to the CFOs, the upshot of all these “barriers” is a disincentive to offer DB plans.
“When we encounter asymmetry between risk and reward in our day-to-day business, we invariably choose to minimize or avoid such an investment or we divest. This common-sense business approach is being applied increasingly these days to the funding and management of defined benefit plans,” they write.
DC plans have their concerns, too
At Petro-Canada, Noel-Bentley deals with a grandfathered DB plan and a DC plan for employees who joined after 1996. The majority of staff are now part of the DC plan.
For the DB plan, Petro-Canada still has to manage funding, but Noel-Bentley says the time requirements are not outrageous.
With the DC plan, the most important task is employee communications, she says.
When Petro-Canada first adopted a DC plan in ’96 it set up an employee pension advisory committee. Eight to 10 employees from across the company and across the country sit on the committee. They meet a few times a year, not to make policy decisions, but to help develop Petro-Canada’s communication strategy.
The concern is that without proper DC plan communication and education, employees will mismanage their retirement and come after the plan sponsor for failing to provide them the information they need to adequately plan for the future.
But not everyone is approaching member communication and education with due diligence.
Fred Pamenter, managing partner with Pamenter, Pamenter, Brezer and Deganis, a Toronto-based HR consulting firm, has more than 25 years’ experience sitting on pension trustee boards. He’s concerned not enough employers are taking the threat of employee litigation over poor DC returns seriously enough. Not only do employers have a responsibility to ensure appropriate education and communication, they must be wary of giving advice.
“It can be a fine line between education and advice,” Pamenter says. “As an employer you shouldn’t give advice, you’re not qualified to, and if you do you are building a liability for yourself. Some employers are sufficiently aware of this, others are not.
“We haven’t seen the end of this. The fallout of DC plan lawsuits will start when the members start retiring.”
As it turns out DC plans are not a fail-safe solution for sponsors looking to get off the DB treadmill.
Only one in 232 firms tracked bailed out completely
Towers Perrin surveyed 232 plan sponsors, examining the years 2000 though 2004. During the five-year period, 10 per cent of DB plan sponsors shifted to DC plans. Another 13 per cent altered their DB plans from a “pure DB” plan design to plans that combined DB and DC, or give greater flexibility within a DB plan.
Seventy-seven per cent of sponsors in the survey stayed with their “pure” DB plans. Only one plan sponsor dropped its plan completely.
Interestingly, six per cent of sponsors that previously shifted from DB to DC switched back to DB.
“Is DC necessarily the perfect design? The answer is ‘apparently not,’” says Ian Genno, principal with Towers Perrin in Toronto. “I wouldn’t say it’s a trend, but it challenges the notion that DC is the perfect end-state.”
New employers are still creating pension plans, says Genno. For the most part this represents companies entering the Canadian market that are looking to provide competitive compensation packages.
As for employers that already have plans?
“Once they offer retirement benefits it’s hard to move away from that,” says Priscilla Healy, legal counsel with Mississauga, Ont.-based law firm Pallett Valo and a retired Towers Perrin principal.
But sponsors want change, and the issue of surpluses is a big part of that. It’s not just a question of what to do with a surplus during a full or partial plan windup, she notes.
“Surplus issues come up in mergers, acquisitions, asset transfers, contribution holidays and benefit improvements for members. The wording in some plans has resulted in sponsors not even being able to pay the plan administrator’s fee from plan revenue.”
Employers feel they can’t even use the surplus for legitimate reasons to benefit members, says Genno. Some employers respond by looking to put as little into the plan as possible.
“As funding rules have become stricter employers look for ways to reduce cash contributions. They look at riskier investments that are less prudent.”
This contribute-less, invest-more-aggressively response can invariably lead to more losses. The upshot is that stricter funding and regulatory control, combined with court decisions unfavourable to sponsors, lead to a weaker pension system instead of the intended fund security, Genno says.
Is there a solution?
CAPSA’s long and winding road
The Canadian Association of Pension Supervisory Authorities (CAPSA) brings together the country’s pension regulators with a mandate to make the pension system more efficient and effective. For the past five years, CAPSA has been working on a “model pension law” that harmonizes pension legislation across Canada.
In January 2004, CAPSA released a consultation paper on regulatory principles for a model pension law. That was followed by six months of consultations, which resulted in about 50 principles being divided into three categories:
*less contentious items (representing plan administration and basic entitlement standards);
*issues that need some more thought (such as funding); and
*contentious issues (such as how to handle surpluses).
The Task Force on Common Pension Standards was set up to develop the details for laws and regulations for the first, non-contentious category. In the second category, a discussion paper on funding principles was released this June. Contentious issues still need to be dealt with.
Nurez Jiwani, director of the regulatory co-ordination branch of the Financial Services Commission of Ontario and chair of the Task Force on Common Pension Standards, says work on the non-contentious issues will likely be finished and presented to CAPSA in the fall of 2006.
“My guess is we would likely have to consult with industry at that stage,” says Jiwani.
And CAPSA must still determine if it will present its work on non-contentious issues to governments separately, or wait until work on all three categories is completed. “I think a good time to discuss that is next fall when we finish category one,” Jiwani says.
With a number of issues to address and steps to be taken, a guess at when governments will have a reform package in front of them is not easy to come by, even for CAPSA insiders. If and when governments will act to adopt model pension legislation once it is presented is even more uncertain.
The need for political consensus across jurisdictions is the “Canadian disease,” notes Healy. Bringing Canada’s politicians together on any issue, be it pensions or health care, is much like “herding tigers,” she says.
Pension plan sponsors had it good for a long time, when stock market investments made it easy for plans to grow in value. But those days are over. Pension law reform will help the viability of DB plans. The question is when.
