Header graphic for print

Pensions & Benefits Law

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

Pension Holiday Wish List

Posted in Canada Pensions & Benefits Law, DB Plan Funding, DC Plans, Innovation & Plan Design, Pension Reform, Target Benefit Plans

As policy makers across the country implement pension reform and address priorities, we wanted to highlight a few of the recent reforms impacting private sector registered pension plans that, in our view, are positive steps, warranting consideration in the other jurisdictions:

Optional Tool Box Stocking Stuffers

  • Solvency Reserve Accounts
  • Target Benefit Plans
  • Variable Payments from Pension Plans

Under the Tree Discharge Item

Alberta Solvency Reserve Accounts: An Answer to Trapped Capital?

Posted in Canada Pensions & Benefits Law, DB Plan Funding, Innovation & Plan Design, Pension Reform

Defined benefit plan sponsors in Alberta (and soon British Columbia) should carefully consider taking advantage of recent (and forthcoming) legislation in those provinces permitting them to establish solvency reserve accounts (SRAs) as an effective way of funding their plans and avoiding the much dreaded “trapped capital” concerns that have often undermined defined benefit (DB) plan security over the last several decades.

Sponsors have traditionally viewed themselves as being vulnerable to the risks associated with restrictive surplus withdrawal rules and accounting treatment if their DB pension plans are more than 100% funded on a wind up basis for any significant period. To better manage these surplus-related concerns, many sponsors prefer to run their plans at a slight deficit, or where allowed, to partially replace traditional plan funding with an expensive letter of credit security.

The irony is that the desire to avoid trapped capital risk may produce results which are completely at odds with one of the primary goals of pension legislation – the adequate protection of member benefits. Continue Reading

New Ontario Requirements re SIPPs and Former Member / Retiree Pension Statements: Are You Ready?

Posted in Canada Pensions & Benefits Law, Investments, Pension Reform, Plan Administration

As discussed in a previous blog post, the Ontario government is continuing its ongoing pension reform initiative by amending the Pension Benefits Act (Ontario) (the PBA) and its accompanying Regulations. On November 27, 2014, new amendments to the Regulations under the PBA came into force, revising the rules related to Statements of Investment Policies and Procedures (SIPPs), and adding a new requirement to send pension statements to the plan’s former members and retired members. We summarize these changes below, and explain what they mean for plan administrators. Continue Reading

Myth #4: Defined Benefit Plans are “Guaranteed”

Posted in Canada Pensions & Benefits Law, Target Benefit Plans

In this final post of our series on the myths surrounding target benefit plans (TBP) and defined benefit (DB) plans, we address probably one of the biggest myths surrounding DB plans – that their benefits are guaranteed.

What is truly guaranteed in life other than death and taxes?

The answer is “nothing”. The traditional DB pension plan – where the employer “guarantees” the pension benefits – may not be sustainable in some public and private sector cases and could lead to crisis situations that TBPs could help avoid. Generous DB plans may, in adverse circumstances, put both the members and the employer at risk. There have been many high profile instances over the last decade or so where the pension solvency issues threatened the continued operation of an organization. And, there have been other high profile instances where a company has gone under and pensions have been permanently reduced. Ultimately, the so called “guarantee” comes down to the employer’s willingness and ability to pay. Continue Reading

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