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Pensions & Benefits Law

A Discussion of Canadian and U.S./Cross-Border Pension & Benefit Legal Issues

Myth #3: Unions and Employees are Opposed to Target Benefits

Posted in Canada Pensions & Benefits Law, Target Benefit Plans

In our posts over the past two weeks, we discussed some of the myths surrounding target benefit plans (TBPs), clarifying that:

In this post, we consider another myth – unions and employees are opposed to target benefits. Continue Reading

The Inattentive Fiduciary: When Supervisors Don’t Supervise

Posted in U.S. Pensions & Benefits Law

The United States Department of Labor recently commenced legal action against a plan investment manager who failed to diversify plan investments, then sold the portfolio and left the proceeds uninvested for a period of two months, causing $7 million in losses. The complaint  also named members of the Retirement Committee that retained the manager, and particularly cited them for failing to monitor the investment manager and take action to correct this problem. In addition to seeking restoration of plan losses, the complaint asks the court to remove the committee members and appoint an independent fiduciary in their place.

This complaint serves as a forceful reminder to plan committee members that their responsibilities to monitor investment managers are ongoing and don’t end when the hiring process is completed. Continue Reading

Myth #2: Limiting Employers’ Pension Design Options Means Continued Defined Benefit Plans

Posted in Canada Pensions & Benefits Law, Target Benefit Plans

Last week, we began a blog post series that considers some of the common myths surrounding target benefit plans (TBPs). In this post, we respond to the suggestion by some that if you do not offer employers the option of implementing a TBP, they will simply choose to continue their existing traditional defined benefit (DB) plans.

One of the key flaws with this suggestion is that it appears to overlook the fact that the private pension system is a voluntary one. Subject to notice requirements and/or applicable collective agreements, employers can generally prospectively change or eliminate benefits provided to employees, including pensions as long as accrued benefits are preserved. Employers have been exiting traditional DB pension plans in droves over the last few decades. This shift has been as a result of numerous factors, including employers’ desire for cost predictability, concerns over funding volatility and long term affordability given escalating longevity risks. For single employers, most pension standards legislation provides only one other pension design option for an employer wishing to change from DB – defined contribution (DC) pension plans. Often times negotiations will result in the preservation of DB plans for those employees who have them, with new employees being placed in a DC plan. Sometimes employers will exit the registered pension plan regime altogether in favour of Group RRSPs for new hires. Continue Reading

Derivatives Investments for Pension Plans: FSCO Guidance Note for Comment

Posted in Canada Pensions & Benefits Law, Investments

In response to perceived concerns about the lack of understanding of the risks associated with investments in derivatives, the Financial Services Commission of Ontario (FSCO) has developed guidelines for pension plans investing in derivatives and similar financial instruments. Currently in draft form, FSCO’s Investment Guidance Note on Prudent Investment Practices for Derivatives is posted for public comment until November 24, 2014.

FSCO’s Note is framed as a set of expectations of those investing in derivatives and is intended to serve as a starting point for plan administrators. It contemplates a system for internal oversight of derivatives practices that is extremely broad in scope and will increase the costs to pension plans that invest directly in derivatives or that invest in pooled funds that use derivatives. The suggestion in the Note is that prudence might require more, but not less, rigorous practices. Continue Reading

Myth #1: Target Benefits are a New “Untested” Concept

Posted in Canada Pensions & Benefits Law, Innovation & Plan Design, Target Benefit Plans

This is our first post (in a four-part series) where we address common myths associated with target benefit plans and defined benefit pension plans. For more on target benefit plans see our prior posts (Part I, Part II and Part III).

Before we get started on the myths, it is important to understand what target benefit plans (TBPs) are and how they differ from, but also share the attributes of defined benefit (DB) and defined contribution (DC) plans.

DB plans provide a pension payable for life at retirement and the employer is responsible for funding the benefit, subject to any fixed required employee contributions. Where there are funding deficits in the plan, the employer is required to make additional payments to address the deficiency.

DC plans are similar to group RRSPs and provide a capital accumulation savings-type vehicle. Employer contributions (along with any employee contributions) are fixed, but the ultimate benefit for the employee is uncertain, being subject to contributions and investment performance. Because longevity risk is not pooled and each individual has to rely on his or her own savings account, there is a risk of a member outliving his or her retirement savings.

Like DC plans, contributions to a TBP are fixed (or variable within a narrow range). Like DB plans, target benefit plans provide a DB-type pension at retirement and pool both longevity and investment risks. However, under a TBP, benefits may be adjusted, up or down, in response to the plan’s funded position from time to time. The goal of TBPs is to deliver the targeted benefit, but at the same time ensure sustainability and maintain intergenerational fairness. If there are insufficient funds in the plan to deliver the targeted benefit, the benefits may be decreased. Allowing benefit adjustment is another lever in addition to payment of additional contributions where there are funding concerns.

Myth #1: Target Benefits are a New “Untested” Concept Continue Reading

De-Risking At Risk? Lawmakers Urge Changes

Posted in De-Risking, U.S. Pensions & Benefits Law

Plan sponsors such as Ford, General Motors and more recently, Motorola, have made headlines for implementing strategies to remove liabilities from their balance sheets by cashing out participants and transferring their pension liabilities to third party insurers in accordance with existing law.

Verizon retirees attempted unsuccessfully to enjoin the transfer of their pension obligations to Prudential, and have failed to prevail in subsequent legal actions to undo the transactions. They argued, among other things, that their consent was required, and that they were being exposed to risk by the loss of PBGC insurance when insurers picked up the liabilities.

Others have been concerned that retirees offered the choice between a lump sum settlement and continuing ongoing annuity payments were ill-prepared to make informed choices or to manage the lump sum so as to provide adequate retirement income.

In response to these concerns, the ERISA Advisory Council has discussed whether additional legal requirements would be appropriate, and the PBGC will be requiring information about de-risking transactions as part of its reporting. Continue Reading

IRS Simplifies Rules for Participants in Canadian Plans – Or Does it?

Posted in Canada Pensions & Benefits Law, U.S. Pensions & Benefits Law

Under the US-Canada Income Tax Treaty, U.S. taxpayers who participate in Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) (the Canadian Plans) are not required to pay tax on the annual income and investment gains on their accounts. Tax is owed only when distributions are received from the accounts. However, this tax deferral has not been automatic. In order to claim this special tax treatment, participants in Canadian Plans were required to file Form 8891 annually (providing information about contributions, income and distributions) by attaching it to their U.S. federal income tax return.

The Problem: Many taxpayers who should have filed these forms did not do so, and the requirement to provide information about participation in the Canadian Plans applies even if the treaty deferral is not claimed. In order to claim the tax deferral retroactively if timely filings were not made, taxpayers had to obtain a private letter ruling from the U.S. Internal Revenue Service with its attendant cost. And, of course, those individuals subject to U.S. filing requirements who weren’t filing returns at all or for particular years, perhaps on the mistaken theory that if they owed no U.S. tax, no penalties would apply, haven’t claimed the relief. Continue Reading

How to Maximize Value out of Your DC Plan – Consider These (Non-Decumulation) Strategies (Part IV)

Posted in Canada Pensions & Benefits Law, DC Plans

In Part II and III of this series, we focused on how decumulation strategies can increase DC plan value. In this Part IV, our final instalment in this series, we will focus on other methods through which DC plan value can be increased.

Any strategy aimed at maximizing DC plan value should be sensitive to the particular needs and circumstances of plan stakeholders. For example, where, as is most often the case, the majority of an employer’s workforce are not sophisticated investors, pooled, administrator managed DC investments may be seen as a considerable value-add, increasing DC benefit security. By contrast, this strategy may be viewed as overly “paternalistic” to participants in an institutional investors’ DC plan. More on this particular strategy below. Continue Reading

DC Decumulation Strategies and Plan Administrator/Sponsor Considerations (Part III)

Posted in Canada Pensions & Benefits Law, DC Plans

In our last post in this series, we considered whether the development of decumulation strategies for defined contribution (DC) plans may be a matter of good DC governance. In this post, we review decumulation strategies in more detail, as well as specific considerations for plan administrator and plan sponsors.

We read Jean-Daniel Cote’s excellent August 26, 2014 article in Benefits Canada  and found his list of example steps a DC plan sponsor/administrator might take with respect to decumulation to be very helpful, regardless of whether variable DC pensions are payable from the plan. We have included Jean-Daniel’s list below: Continue Reading

Decumulation – Increasing DC Plan Value and Ensuring Compliance with Best Practices (Part II)

Posted in Canada Pensions & Benefits Law, DC Plans

In Part I of this series, we considered ways in which the “traditional” accumulation driven defined contribution (DC) plan design fails to maximize value. In this post, we discuss variable pensions as well as the role of governance considerations in decumulation strategies.

The interesting opportunity for plan sponsors to consider is how they might significantly increase the overall value of their DC plan through effective decumulation strategies, while doing so at an acceptable cost and without taking on an unacceptable amount of increased administration or fiduciary responsibilities as plan administrator. In this regard, there may be a number of ways to enhance DC plan value, and member appreciation of such value, without any material increase in fiduciary liability. Continue Reading