Archived - Backgrounder
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The pension reform proposals released today have five principal objectives:
- Enhance protections for plan members;
- Reduce funding volatility for defined benefit plans;
- Make it easier for participants to negotiate changes to their pension arrangements;
- Improve the framework for defined contribution plans and negotiated contribution plans; and,
- Modernise the rules for investments made by pension funds.
Other technical amendments to improve the framework are also proposed.
The proposed changes are aimed at federally regulated private pension plans, which represent about 7 per cent of pension plans in Canada.
To implement the complete package of proposals to improve the framework for federally regulated private pension plans, legislative and regulatory amendments will be required.
1. Enhanced protections for plan members
i. Plan sponsors will be required to fully fund pension benefits on plan termination. Any solvency deficit that exists at the time of termination will be required to be amortized in equal payments over no more than five years. The obligations of the employer determined following the termination will be considered unsecured debt of the company. This measure will improve benefit security for members by eliminating the possibility, which exists under current rules, that a pension plan could be voluntarily terminated at a time when plan assets are not sufficient to pay the full amount of promised benefits. It will also improve incentives for plan sponsors to fund their pension plans because it will remove the possibility of terminating a defined benefit pension plan as a way of not addressing a funding deficit.
ii. Employer contribution holidays will be limited. Contribution holidays will only be permitted if the pension plan is more than fully funded by a solvency margin, which will be set at a level of 5 percent of solvency liabilities. The solvency margin enhances benefit protection by creating a cushion to mitigate the risk of the plan falling into an underfunded position due to fluctuating asset and liability values. The practice of taking contribution holidays was widespread in the past and has been a contributing factor towards the underfunding of pension plans during the past several years. A requirement that sponsors file their valuation report annually, instead of every three years for a plan in surplus, will lead to contribution holidays being taken based on a more recent picture of funded status of the plan.
iii. A ratio of 0.85 will be prescribed in regulations to put into effect the existing void amendment provision of the Act. The void amendment provision will restrict benefit improvements by a plan that has or would lead it to have a solvency ratio of 0.85 or less. A solvency ratio of 0.85 has been chosen on the basis that, while a single measure does not fully describe the financial position of a plan, plans with solvency ratios below this level may generally be considered significantly underfunded to a degree that justifies placing restrictions on benefit improvements by such plans. To put into effect a plan amendment that would otherwise be voided under this provision, the sponsor could fund the benefit up front such that the amendment would not have the effect of lowering the solvency ratio of the plan. This measure improves the likelihood that members will receive promised benefits.
iv. Sponsor declared partial terminations will be eliminated from the Act. The elimination of sponsor declared partial terminations will address the present inequity that treats leaving members differently depending on how their employment tenure ends. Without such partial terminations, a member who leaves voluntarily will be treated in a similar fashion to a member who leaves as part of a large corporate restructuring.
v. There will be immediate vesting of benefits. Under the current framework, there is a two-year maximum period before accrued benefits are vested. It is proposed that vesting be made immediate upon membership in a plan. This approach would have the effect of increasing benefits under certain circumstances, such as where a member leaves just prior to the two years of service. In this case, under the current framework, this member would only be entitled to a return of his or her contributions plus interest. With immediate vesting, the same member would be entitled to the entire accrued benefit.
Immediate vesting does not affect the waiting period before membership provided under the Act, which addresses issues related to short-term employees and excessive administrative burdens. The requirement for locking-in of vested pensions would remain at two years of plan membership. The Superintendent will retain the ability to declare a termination in part.
vi. Disclosure requirements will be enhanced.
The information that must be provided in annual member statements will be expanded to include:
- the date of the solvency ratio reported in the annual statement along with the date of the next required valuation report;
- the total assets and liabilities of the plan;
- a summary of the plan's investment allocation and 10 largest investment holdings;
- a statement regarding members' right to examine the plan's Statement of Investment Policies & Procedures; and,
- total employer contributions made for the reporting year.
The requirements for the types of statements will be expanded to include:
- notification to beneficiaries of a plan's termination, along with relevant general information relating to that termination, within 30 days of the termination date; and,
- an annual statement to former members and retirees with relevant plan information.
Electronic provision of disclosure requirements will also be permitted on a positive consent basis, facilitating the provision of disclosure to former members and retirees, and providing plan sponsors with more flexibility to meet disclosure requirements.
Enhanced disclosure requirements will improve plan members' awareness and understanding of the security of their pension benefits, as well as potential risks, and will facilitate informed discussions on these matters between plan members and sponsors.
2. Reduce funding volatility for defined benefit plan sponsors
i. The Government will introduce a new standard for establishing minimum funding requirements on a solvency basis that will use average – rather than current – solvency ratios to determine minimum funding requirements. The average solvency position of the plan for funding purposes will be defined as the average of the solvency ratios over three years, i.e. the current and previous two years. The three solvency ratios used in the determination of the average will be based on the market value of plan assets. Past deficiencies will be consolidated on a permanent basis for establishing solvency special payments (i.e., a fresh start every year). The amortization period for solvency deficiencies will remain at five years. The going concern methodology and its 15 year amortization period will remain unchanged. Annual valuations will be required to support the new solvency funding standard. This measure will mitigate the effects of short-term fluctuations in the value of plan assets and liabilities on solvency funding requirements.
ii. Sponsors will be permitted to use properly structured letters of credit to satisfy solvency payments up to a limit of 15 percent of plan assets. This will provide an alternative means for plan sponsors to satisfy their funding obligations in a secure fashion that does not compromise benefit security.
iii. The 10 per cent pension surplus threshold in the Income Tax Act will be increased to 25 per cent. The Income Tax Act allows employers to make whatever contributions are necessary to ensure that pension benefits promised under a defined benefit Registered Pension Plan are fully funded on an actuarially determined basis. However, if plans have surplus funds over a specified threshold (generally 10 per cent of liabilities on a going-concern basis), employer contributions must generally be suspended. The 10 per cent surplus threshold will be increased to 25 per cent in order to provide more funding flexibility to plan sponsors. A 25 per cent threshold will help employers to better maintain a surplus cushion, thereby reducing the likelihood and severity of funding deficiencies, while containing related tax assistance amounts to a reasonable level. The change will also apply to designated plans under the tax rules and replace the existing surplus tax rules for fixed-cost shared plans (also known as jointly-sponsored plans, where employers and employees share responsibility for funding on an established proportionate basis). The new threshold will apply in respect of employer contributions relating to current service costs for 2010 and subsequent years.
3. Resolution of plan-specific problems
A workout scheme for distressed pension plans will be established to help facilitate the resolution of plan-specific problems that arise in some circumstances when a particular plan sponsor cannot meet near term funding requirements. The workout scheme will permit sponsors, plan members and retirees of a distressed pension plan to negotiate funding arrangements that are not in conformity with the regulations to facilitate a plan restructuring. It will respond to situations where the existing framework imposes funding requirements that cannot be reasonably met, and as such, may actually be detrimental to benefit security. The workout regime is intended to be used in very limited circumstances, by plans and sponsors who critically need a departure from the regular framework in order to try to protect the enterprise and the members' benefits. To facilitate expedient entry, a declaration by the Board of Directors that the sponsor does not anticipate being able to meet its upcoming special payment will be required.
Upon entry, the sponsor will be eligible for a short moratorium on special payments. The moratorium would be a 'quick-response' to immediate pressures, such as a severe cash crunch rendering a company unable to meet its payment obligations, while the negotiated workout would respond to longer term concerns.
The parties would then be at liberty to negotiate changes to their pension arrangements, including the schedule of special payments, with representation provided for plan members, deferred vested members and retirees. Where a workplace is unionized, the bargaining agent would provide representation, while in non-unionized environments and for retirees and other beneficiaries, the Act would provide that a representative would be appointed for these groups. Member and retiree consent would be required. The negotiated workout arrangement would also be subject to Ministerial approval.
4. Framework for defined contribution and negotiated contribution defined benefit plans
i. Provisions of the Act and the Regulations will be revised to provide clarity on the responsibilities and accountabilities of the parties involved with defined contribution plans. Plan sponsors and members will benefit from a framework for defined contribution plans that will:
- Provide explicit guidance on the responsibilities and accountabilities applicable to employers, members, administrators and investment providers with respect to defined contribution plans. The framework will consider the Capital Asset Plan (CAP) Guidelines released by the Canadian Association of Pension Supervisory Authorities to provide best practices on these roles.
- Eliminate the requirement for a Statement of Investment Policy and Procedures for a CAP defined contribution plan.
Measures specifically pertaining to defined contribution arrangements will be clearly articulated in the Act and Regulations.
ii. Pension plans will have the option to permit members to receive Life Income Fund (LIF) style retirement benefit payments directly from a defined contribution pension fund. Permitting the payment of LIF-style retirement benefits directly from the defined contribution plan account balance allows members to continue to have their pension savings managed by the plan, instead of having to assume greater personal responsibility for the management of the funds by transferring them to a LIF account at a financial institution.
iii. The framework respecting negotiated contribution defined benefit plans, which are common in multi employer pension plan arrangements, will be improved by the following measures:
- Create a formal definition of these arrangements in the Act, which will specify that employer contributions are limited to the level negotiated in collectively bargained agreements.
- Establish criteria for the composition of the Board of Trustees of the plan to ensure that all stakeholder interests (i.e., employer, employee and retiree) are represented.
- Specify that the Board of Trustees has the authority to amend the plan to reduce accrued benefits, subject to the amendment being authorised by the Superintendent. This authority of the Board of Trustees will exist despite any terms to the contrary that may exist in the plan text.
- Clarify that the successor plan rules will not be applicable in negotiated contribution arrangements where a defined contribution component is created.
- Enhance information disclosure to members and retirees in order to clearly communicate the nature of the pension arrangement, including that benefits may be reduced if negotiated contributions are insufficient to meet funding requirements.
- Provide that if a valuation shows the pension plan is not meeting minimum funding requirements, the valuation report must include options that the Board of Trustees are considering to resolve the funding shortfall.
5) Modernization of pension fund investment rules
The present pension fund investment framework, which imposes a prudent person standard supplemented with quantitative investment limits, will be modernized as follows:
- Remove the quantitative limits in respect of resource and real property investments.
- Amend the 10 percent concentration limit to limit pension funds to investing a maximum of 10 percent of the market value of assets of the pension fund (rather than the book value) in any one entity. An exception to this rule will exist for pooled investments over which the employer does not exercise direct control, such as mutual fund investments.
- Prohibit direct self investment (e.g., an employer would no longer be permitted to invest any amount of its pension fund in its own debt or shares).
In addition to the above noted measures in support of the five principal objectives, other measures to improve the framework will also implemented.
i. To reduce administrative burden for plan sponsors and permit the orderly windup of plans upon termination, the benefits of members who cannot be located will be permitted to be transferred to a central repository.
ii. The Office of the Superintendent of Financial Institutions will be given additional powers to intervene when there are concerns about the work of a plan's actuary.
iii. A number of other technical improvements to the Act and the Regulations will be made to align the framework more explicitly with the way that it is commonly interpreted and administered. These technical amendments are as follows:
- Restrict annuity purchases for an ongoing plan if the plan is underfunded to be consistent with the treatment of transfers of lump sum benefits.
- Amend the definition of termination to avoid catching situations where the plan is not necessarily terminated, and clarify the timing and content of information to plan beneficiaries following a termination.
- Eliminate pre-1987 references in the Act, which are largely out of date.
- Remove the requirement that pension plans report to the Superintendent on inflation adjustments made to the pension benefits.
- Amend the definition of former member to ensure that plan members who have transferred to a new plan do not have a say in future surplus distributions in the older, original plan.
- Harmonize provisions for the Superintendent to recover costs from pension plans with those in place for federal financial institutions, including by setting them out in the Office of the Superintendent of Financial Institutions Act rather than the Pension Benefits Standards Act, 1985.
- Provision to allow for assessment fee forgiveness and the ability for Superintendent to remit the debt (i.e. to decide not to pursue fees, where it is clearly not cost effective).
- Clarify that in situations where the accrued benefits constitute small amounts, they can be paid out as a lump sum at retirement. This will be consistent with the treatment given when a member otherwise ceases membership or dies.
- Clarify that an administrator shall comply with a court order or separation agreement related to pension entitlements, in situations that run contrary to the Act requirement for a joint and survivor pension benefit.
- Extend the waiting period on surplus distributions to 30 days after Superintendent consents from 14 days.
- Clarify that the custodian must notify the Superintendent of late remittances, for both amount and time.
- Amend the authority of the Minister to enter into agreements with the provinces respecting the administration of multi-jurisdictional plans in order to permit an agreement to be signed setting out the rules applicable to such pension plans.
Require that payments owed to pension plans be remitted monthly rather than quarterly.