Pension Reform Proposals Released By Finance Canada
Finance Canada Minister Jim Flaherty released a series of proposals designed to improve the legislative and regulatory framework for federally regulated pension plans. No indication was given as to the timing of the amendments to the Pension Benefits Standards Act, 1985 (PBSA) and the Pension Benefits Standards Regulations, 1985 (PBSA Regulations) that will be required to implement the proposals. The proposals contain a host of measures which appear to be designed to provide “something for everyone”. The press release does not mention any willingness on the part of the government to seek further input from stakeholders.
Five objectives are being pursued by the proposals.
1. Enhanced Protection for Plan Members
- Plan sponsors will be required to fully fund pension benefits on plan termination over a 5 year period . It should be noted that the wind-up funding obligation will be considered an unsecured debt of the company, thus ranking on the same footing as any other unsecured creditor in the event of a bankruptcy. This change brings the PBSA into line with the requirements in most other Canadian pension jurisdictions.
- Contribution holidays by plan sponsors will not be permitted unless the plan has a solvency surplus of 5% or more.
- Benefit improvements which would reduce the solvency ratio of the plan to less than 85% will not be permitted and plan sponsors will be required to file annual actuarial valuations.
- Employer declared partial terminations will be eliminated thus ensuring that employment terminations, whether voluntary or not, will be treated the same way.
- Vesting of benefits will be immediate on commencement of plan participation. However, the 2 year waiting period currently allowed before participation begins will be maintained.
- Enhanced disclosure of information will be required to provide plan members with greater understanding of the plan’s financial situation.
2. Reduced Funding Volatility
- A new solvency standard will be introduced which will allow plan sponsors to measure their solvency funding requirements using the plan average solvency ratios over the last 3 years based on the market value of assets. Past deficiencies will be consolidated each year and the solvency deficit amortization period will remain at 5 years.
- Letters of credit will be permitted in lieu of actual solvency payments up to a maximum of 15 % of the plan’s assets.
- The 10% surplus threshold under the Income Tax Act will be raised to 25% beginning with 2010 current service contributions thus allowing a greater amount of employer contributions to be made. It should be noted that the increased threshold should apply to all registered pension plans, whether federally or provincially regulated.
3. Resolution of Plan-Specific Problems
A framework will be available to sponsors and members of plans where the sponsor is unable to meet the statutory funding requirements. The framework will permit all stakeholders to agree to a “workout scheme” that would allow the company to benefit from a short moratorium on deficit payments and the members to agree to change the pension arrangements. Any such workout would be subject to member and retiree consent and Ministerial approval. It would appear that the recent arrangement arrived at between Air Canada and its unions and retirees is the source of this proposal.
4. Enhanced Framework for Defined Contribution and Negotiated Contribution Defined Benefit Plans
The PBSA and PBSA Regulations, which currently do not adequately address DC plans, will be amended to clarify the duties and responsibilities of sponsors, members, administrators and investment providers. DC plans will also be allowed to pay Life Income Fund-like retirement benefits, thus allowing plan members to benefit from the investments of the pension plan instead of having to personally assume investment decision-making responsibilities.
Negotiated Contribution Defined Benefit Plans will be subject to an improved framework, which will include greater clarity about employer contribution obligations, and explicit trustee authority to reduce accrued benefits subject to Superintendent authorization.
5. Modernization of Investment Rules
Much needed changes to the current investment rules are proposed including removing quantitative limits on resource and real property investments, determining the 10% concentration limit by measuring the plan’s assets according to market value instead of book value, and prohibiting investments in employer shares or debt.
Other Measures
A number of technical housecleaning measures are also proposed to better align the PBSA and PBSA Regulations with current interpretation and policy.
