Target benefit provision, solvency reserve account among pros for employers
A long-awaited overhaul of the Pensions Benefits Standards Act in British Columbia should provide greater flexibility and more options for employers. But there will also be strong requirements around governance, which could lead to additional administration costs, according to industry experts.
Since a joint expert panel on pensions between B.C. and Alberta convened in 2008, people have been waiting “with baited breath” for pension reforms, said Lisa Chamzuk, a partner at Lawson Lundell in Vancouver practising in pension and employee benefits.
In acknowledging the inadequacies of both defined benefit (DB) and defined contribution (DC) plans, such as funding shortfalls and investment risks, Bill 38 is promising new plan structures and features that allow employers and employees to share the risk of poor investment returns and plan governance, she said, with “a full smorgasbord of options.”
“What the new statute will do is give employers much more flexibility in terms of how they establish a pension plan or even if they have an existing pension plan, how they can tweak it so that it works better for their own fiscal reality and makes it more likely that they’ll keep in the pension business.”
The new act is expanding possible plan provisions and plan types, which should give plan sponsors a lot more flexibility, said Catherine Robertson, a principal and actuary at actuarial and consulting firm Eckler in Vancouver.
“It’s certainly a step in the right direction, but there’s concern that hopefully the regulations will not be too prohibitive so that the flexibility that this seems to be providing will come into fruition.”
The positives outweigh the negatives for employers, according to Greg Heise, partner in the Vancouver retirement solutions practice at Morneau Shepell in Vancouver.
“We’re really hoping this will reinvigorate the pension industry,” he said. “It remains to be seen whether or not that will actually happen but certainly all of us — HR professionals, actuaries, consultants, regulators — all of us hope this is a positive step.”
One new feature is a target benefit provision that can be added to any type of pension plan. This promises a benefit upon retirement, resembling a DB plan, but can be amended should funding concerns arise. The provision creates a safety valve of sorts, which can help an employer ride out a period of poor investment returns, said Chamzuk.
“The benefit can undergo kind of a contraction and expansion depending on what the funding status of the plan is, so employees then share a little bit of a risk,” she said. “So, it doesn’t impose on the employer alone the obligation to fund that benefit.”
The flexibility provided by a target benefit provision would certainly be welcome, said Robertson.
“It would enable plan sponsors to hopefully better control their costs,” she said. “If they do find that financially things go off the rails a bit, the target benefit provision is going to allow them more flexibility to adjust that target without necessarily having to close the plan completely and only offer a defined contribution plan, for example.”
The new act will also allow a sponsor to create a solvency reserve account in a classic DB pension plan. Historically, when payments were needed to fund the benefits promised by the plan due to poor investment returns, employers would make those payments and the funds were inaccessible afterwards, even if the plan’s funded position improved and the plan had an excess of funds, said Chamzuk. The new act will allow sponsors to have a separate account for special payments, and excess can be withdrawn if appropriate.
“A solvency reserve account will introduce some welcome flexibility because plan sponsors will be able to know they can put those solvency contributions in but, if things do turn around, then there’s more flexibility that they’re able to take that money out when it’s no longer required,” said Robertson.
The account could see more employers willing to fund more than the minimum, said Heise.
“And funding the minimum over the last 10 years is probably a contributing factor to the underfunded status of plans today, which is probably at one of its all-time lows.”
In addition, the act makes significant changes to the administration rules for pension plans. A new governance policy will be mandatory and regular governance reviews or assessments will be required. The new requirements are being imposed to make plans more transparent, said Chamzuk.
“They’re raising the bar on the standards that apply for how plans are governed and administered. It’s absolutely appropriate,” she said, adding well-run plans in B.C. are doing this already but any lagging behind will have to respond.
Another change concerns the vesting period. Previously, plans could impose a two-year vesting requirement, so there was no entitlement until a person was a member for two years and if she quit before that, employer contributions made on her behalf stayed in the plan. With the new act, any B.C. employee will be immediately vested in the DB pension.
That shouldn’t have a major impact on the cost of plans and follows what most other provinces are doing, said Robertson.
“It’s welcome news for most employees who have this type of plan but not a significant issue as far as plan sponsors are concerned.”
However, the vesting change could represent a significant additional administration cost, said Heise. For example, if an employee only works for one month and then leaves, the employer now has to process a benefit for that person whereas before there were no material costs associated with his departure.
This has left employers, such as those in Ontario, grappling with trying to change eligibility rules so there is a longer eligibility period, he said.
“I can’t necessarily fault the government for wanting to harmonize but it’s a little sad, from my perspective, that we’ve gone the route of the most costly common denominator,” said Heise, adding the provinces are following the lead of Quebec, which has 100 per cent immediate vesting.
The passing of Bill 38 also includes a section around the suspension of active membership while a plan member remains employed. There will be no accrual of benefits during the suspension, according to the act.
It will be interesting to see what the regulations say on this provision, which gives members flexibility if they are undergoing financial hardship, said Robertson.
“If I was a plan sponsor, I would prefer not to have that option made available to my employees because I’d be concerned that you’re providing the plan for their benefit and if they’re in effect opting out, then they’re not getting the benefit of the plan.”