Former law school dean to head panel focused on DB funding issues
With new pension funding rules being proposed in Alberta, Quebec and in the federally regulated sector, it’s high time the Ontario government undertakes a serious reform of current pension laws, say some pension experts.
They’re responding to an announcement last month by the province to set up an expert commission to review the pension system. The commission, expected to report back in the summer of 2008, will focus on such issues as plan funding and surplus, plan windups, splits and mergers, asset transfers between pension plans and the funding of defined benefit multi-employer pension plans. It will also look at the province’s Pension Benefits Guarantee Fund, which is the only pension guarantee regime of its kind in Canada.
Heading the review is Harry Arthurs, a labour law expert and former dean of York University’s Osgoode Hall Law School in Toronto. When this commission was announced, Arthurs had just wrapped up a two-year project reviewing federal labour standards.
“I think the pension system is something we’re all concerned about,” said Arthurs. “There are huge amounts of money tied up. There are people’s hopes and dreams tied up. There’s the stability for companies that have made financial commitments to future and current pensioners. All of these things are tied up in the pension scheme so everybody’s anxious to ensure that it is what it seems to be.”
More than two million plan members belong to the 7,500 pension plans registered in Ontario. According to Statistics Canada, 83 per cent of members belong to defined benefit pension plans, which represented 51 per cent of the plans.
Mark Newton, a lawyer with Heenan Blaikie in Toronto and chair of the Ontario Bar Association’s Pension and Benefit Section, said Ontario’s review is overdue. There haven’t been changes to the province’s pension law since 1987, and yet “the pension landscape in Ontario has changed dramatically,” Newton said in a letter he sent last June to Finance Minister Greg Sorbara urging for a bipartisan commission.
In an interview with Canadian HR Reporter Newton named funding rules as one of the most important issues to address. The federal government has taken steps this year to ease funding requirements, allowing plan sponsors to extend the solvency funding period to 10 years if no more than one-third of the members object or if the difference between a five-year and the 10-year payment level is secured by a letter of credit. Quebec has also relaxed funding rules last year to allow solvency deficiencies to be funded over 10 years with a letter of credit or if no more than 30 per cent of members object. In Alberta, proposed funding rules would go even further and allow a sponsor to fund the entire solvency deficiency with a letter of credit.
“So Ontario is really behind other jurisdictions. Given that Ontario administers more plans than other provinces in Canada, it’s about time that they do something,” said Newton.
With respect to the rapid demise of defined benefit plans, Newton said changing funding rules may be just the start of the work required.
“Regulators often talk about levelling the playing field between defined benefit and defined contribution plans. In my view, they have to do more than that. They should be providing special incentives to keep or create defined benefit plans,” he said, pointing to the tax law to favour DB plans as an example. “This study will not go that far, but we’re going to continue seeing a demise of defined benefit plans unless they are given special treatments.”
Newton said he hoped aspects of Ontario’s pension law that are markedly different from other provinces’ legislations will be eliminated as a result of this commission, such as the Pension Benefits Guarantee Fund — “It’s underfunded, it’s running at a negative cash flow so it’s not a very effective instrument” — and grow-in rules for partial windups. (Under grow-in rules, which exist only in Ontario and Nova Scotia, an employee whose age and years of service totals 55 or more would be entitled to early retirement benefits.)
He suggested the commission will likely refer to the model pension law, which the association of Canadian pension regulators has been working on for six years, in its effort to bring Ontario’s pension legislation in line with other jurisdictions.
“I’m not too hopeful that we will have model legislation across Canada — different parties have been working on that for 20 years and every jurisdiction seems to go its own way to some extent,” said Newton. “That said, I think the model law…can be used as a justification for changing those aspects of (Ontario’s) legislation because they’re markedly different from other jurisdictions in Canada. ”
Chris Schenk, research director of the Ontario Federation of Labour, said the terms of reference of this review aren’t broad enough to include a real structural change to the system. One change he’d like to see is the removal of the obligation for sponsors to take a contribution holiday when the fund is in surplus, but that would require changing federal tax laws. He suggested that what workers really need is a portable pension scheme — “a richer Canada Pension Plan” — and contemplating that seems to be out of the scope of this review, he said.
Scott Perkin, president of the Association of Canadian Pension Management, said he hopes this review will pick up on the issues left unresolved with the demise of Bill 198, introduced in 2002 by the provincial Conservatives. The pension provisions in the bill, which would change the legislation to not require any surplus distribution on partial windup, were never proclaimed.
“I think the panel members they’ve appointed come with a lot of expertise and differing perspectives. And I think they’ll hopefully be mindful of what happened three years ago when they have their consultation process,” said Perkin.
The province has also appointed experts to provide Arthurs support, including Bob Baldwin, former research director at the Canadian Labour Congress; Kathryn Bush, a lawyer in the Pension and Employee Benefits Group of Blake, Cassels and Graydon; Murray Gold, a lawyer with Koskie Minsky who specializes in pension and benefits issues; and Ian Markham, actuary and director of pension innovation at Watson Wyatt.
Pension permutations
Alberta’s pension changes
Changes in Alberta’s Employment Pension Plan Act, which came into effect on Aug. 10, include:
Plan administration: Albertans now have earlier and easier access to pension money, as members age 50 plus who withdraw from a plan due to retirement, job termination, death or divorce must now be offered the option to cash out up to 50 per cent of the funds. With this unlocking option, members can also transfer the amount to a non-locked savings vehicle such as a registered retirement savings plan.
Plan funding: All required contributions must be remitted monthly, including contributions towards normal costs as well as special payments for unfunded liability or solvency deficiencies. A custodian must be established for individually trusteed pension plans, and plan text must clearly identify who is responsible for investment decisions.
Filing and disclosure: Annual audited pension plan financial statements are required of all defined contribution plans with assets of $1 million or more and all defined benefit plans with assets of $3 million or more.
Source: Eckler Analysis
They’re responding to an announcement last month by the province to set up an expert commission to review the pension system. The commission, expected to report back in the summer of 2008, will focus on such issues as plan funding and surplus, plan windups, splits and mergers, asset transfers between pension plans and the funding of defined benefit multi-employer pension plans. It will also look at the province’s Pension Benefits Guarantee Fund, which is the only pension guarantee regime of its kind in Canada.
Heading the review is Harry Arthurs, a labour law expert and former dean of York University’s Osgoode Hall Law School in Toronto. When this commission was announced, Arthurs had just wrapped up a two-year project reviewing federal labour standards.
“I think the pension system is something we’re all concerned about,” said Arthurs. “There are huge amounts of money tied up. There are people’s hopes and dreams tied up. There’s the stability for companies that have made financial commitments to future and current pensioners. All of these things are tied up in the pension scheme so everybody’s anxious to ensure that it is what it seems to be.”
More than two million plan members belong to the 7,500 pension plans registered in Ontario. According to Statistics Canada, 83 per cent of members belong to defined benefit pension plans, which represented 51 per cent of the plans.
Mark Newton, a lawyer with Heenan Blaikie in Toronto and chair of the Ontario Bar Association’s Pension and Benefit Section, said Ontario’s review is overdue. There haven’t been changes to the province’s pension law since 1987, and yet “the pension landscape in Ontario has changed dramatically,” Newton said in a letter he sent last June to Finance Minister Greg Sorbara urging for a bipartisan commission.
In an interview with Canadian HR Reporter Newton named funding rules as one of the most important issues to address. The federal government has taken steps this year to ease funding requirements, allowing plan sponsors to extend the solvency funding period to 10 years if no more than one-third of the members object or if the difference between a five-year and the 10-year payment level is secured by a letter of credit. Quebec has also relaxed funding rules last year to allow solvency deficiencies to be funded over 10 years with a letter of credit or if no more than 30 per cent of members object. In Alberta, proposed funding rules would go even further and allow a sponsor to fund the entire solvency deficiency with a letter of credit.
“So Ontario is really behind other jurisdictions. Given that Ontario administers more plans than other provinces in Canada, it’s about time that they do something,” said Newton.
With respect to the rapid demise of defined benefit plans, Newton said changing funding rules may be just the start of the work required.
“Regulators often talk about levelling the playing field between defined benefit and defined contribution plans. In my view, they have to do more than that. They should be providing special incentives to keep or create defined benefit plans,” he said, pointing to the tax law to favour DB plans as an example. “This study will not go that far, but we’re going to continue seeing a demise of defined benefit plans unless they are given special treatments.”
Newton said he hoped aspects of Ontario’s pension law that are markedly different from other provinces’ legislations will be eliminated as a result of this commission, such as the Pension Benefits Guarantee Fund — “It’s underfunded, it’s running at a negative cash flow so it’s not a very effective instrument” — and grow-in rules for partial windups. (Under grow-in rules, which exist only in Ontario and Nova Scotia, an employee whose age and years of service totals 55 or more would be entitled to early retirement benefits.)
He suggested the commission will likely refer to the model pension law, which the association of Canadian pension regulators has been working on for six years, in its effort to bring Ontario’s pension legislation in line with other jurisdictions.
“I’m not too hopeful that we will have model legislation across Canada — different parties have been working on that for 20 years and every jurisdiction seems to go its own way to some extent,” said Newton. “That said, I think the model law…can be used as a justification for changing those aspects of (Ontario’s) legislation because they’re markedly different from other jurisdictions in Canada. ”
Chris Schenk, research director of the Ontario Federation of Labour, said the terms of reference of this review aren’t broad enough to include a real structural change to the system. One change he’d like to see is the removal of the obligation for sponsors to take a contribution holiday when the fund is in surplus, but that would require changing federal tax laws. He suggested that what workers really need is a portable pension scheme — “a richer Canada Pension Plan” — and contemplating that seems to be out of the scope of this review, he said.
Scott Perkin, president of the Association of Canadian Pension Management, said he hopes this review will pick up on the issues left unresolved with the demise of Bill 198, introduced in 2002 by the provincial Conservatives. The pension provisions in the bill, which would change the legislation to not require any surplus distribution on partial windup, were never proclaimed.
“I think the panel members they’ve appointed come with a lot of expertise and differing perspectives. And I think they’ll hopefully be mindful of what happened three years ago when they have their consultation process,” said Perkin.
The province has also appointed experts to provide Arthurs support, including Bob Baldwin, former research director at the Canadian Labour Congress; Kathryn Bush, a lawyer in the Pension and Employee Benefits Group of Blake, Cassels and Graydon; Murray Gold, a lawyer with Koskie Minsky who specializes in pension and benefits issues; and Ian Markham, actuary and director of pension innovation at Watson Wyatt.
Pension permutations
Alberta’s pension changes
Changes in Alberta’s Employment Pension Plan Act, which came into effect on Aug. 10, include:
Plan administration: Albertans now have earlier and easier access to pension money, as members age 50 plus who withdraw from a plan due to retirement, job termination, death or divorce must now be offered the option to cash out up to 50 per cent of the funds. With this unlocking option, members can also transfer the amount to a non-locked savings vehicle such as a registered retirement savings plan.
Plan funding: All required contributions must be remitted monthly, including contributions towards normal costs as well as special payments for unfunded liability or solvency deficiencies. A custodian must be established for individually trusteed pension plans, and plan text must clearly identify who is responsible for investment decisions.
Filing and disclosure: Annual audited pension plan financial statements are required of all defined contribution plans with assets of $1 million or more and all defined benefit plans with assets of $3 million or more.
Source: Eckler Analysis
