Pensions need ‘safe harbour’ provisions

Fear of lawsuits may scare employers off all plans, including DCs and RRSPs: C.D. Howe

A few years ago, a client of benefits consulting and financial services firm the Williamson Group in Brantford, Ont., was very close to being sued by an employee who didn’t speak English as a first language. She retired but had never heard of a company-sponsored pension plan — the company settled, in an afternoon, and paid all she was owed back to 1988.

“That was an eye-opener for me. Wow, what does happen in the United States does come this way,” said Leslie Sing, pension consultant at the Williamson Group.

That very issue is addressed in a recent paper from the C.D. Howe Institute in Toronto that says employers keen to enhance employees’ retirement prospects may pull back for fear of lawsuits. It says employers are already abandoning the defined benefit (DB) pension plan because of legal concerns, so it would be a blow to retirement security if they also declined to sponsor money-purchase alternatives such as defined contribution (DC) plans and group RRSPs.

Therefore safe harbours — legal protection for good-faith actions to foster smart employee choices — are required through timely federal and provincial pension legislation.

“You want to be a good employer and steer employees to wiser choices, but the downside is you’re potentially stepping over the line as far as active involvement,” said William Robson, president and chief executive officer of C.D. Howe and author of Safe Harbours: Providing Protection for Canada’s Money-Purchase Plan Sponsors.

“Lawsuits are more of an incipient problem now but could get more serious over time,” he said. “There are a number of things we need to move forward on to make the world of money-purchase plans a more congenial one.”

Sponsors have had some bad experiences, through unexpected results in pension litigation, said Peter McLellan, a partner and head of the pensions and employee benefits group at the law firm Stewart McKelvey in Halifax. Most of the cases have concerned DB plans, with decisions on surplus ownership, surplus sharing on a partial windup and restrictions on plan expenses and cost-sharing.

So employers are “extremely, and should be, gun shy about ever establishing or continuing with virtually any form of registered pension plan today,” said McLellan. “We need to provide the balance back that some of the court decisions have not provided. We’re only at the cusp of DC legislation but we’re not going to have enough entrants in the marketplace unless the balance is provided and provides that protection.”

Five key problems addressed

To show how safe-harbour provisions can help, Robson provides solutions for several problems that can arise when participants in money-purchase plans control their contribution rates and investment choices.

First, to encourage employees to participate in pension plans, make automatic enrolment the default option so non-participation is “an active decision.” Second, employers could set a default contribution rate that applies unless an employee actively chooses to contribute at a lower rate.

A third problem concerns employees who invest unwisely, taking on too much risk, accepting low returns or using vehicles with high administration fees. Employers could steer them into life-cycle-appropriate portfolios or vehicles with lower fees. To curtail participants who cash out early from group RRSPs, employers could set a default annuitization. And fifth, employers could make group and individual advisory services another default option.

Robson said the Guidelines for Capital Accumulation Plans (CAP Guidelines), from the Joint Forum of Financial Market Regulators, present a useful checklist in clarifying the rights and responsibilities of plan sponsors, service providers and participants. However, they don’t provide direct legal protection and may end up serving as a guide to litigation and therefore deter employers, he said.

“A reasonable near-term step for policy-makers motivated to improve the situation would be legislative or regulatory endorsement of the CAP guidelines as a safe harbour for employers,” said Robson.

Auto escalation makes sense because many people assume, if the company offers anything, they’ll be fine for retirement so they blindly contribute, said Anne Williamson, account manager at the Williamson Group. Asset-allocation funds and life-cycle funds “make a whole lot of sense” to prevent employees from jumping from fund to fund or reacting to market changes.

Plan sponsors cite employee behaviour and education as critical issues, said David Burke, Toronto-based retirement practice director at Watson Wyatt Canada.

“The best way to ensure plans are effective is to have as many auto features as possible: auto enrolment, increased contributions, target-date funds or target-risk funds. Those aren’t perfect, they’re expensive, but those costs get dwarfed over time compared to the risk of people making bad decisions.”

Latest stories