Legislation, liability among lingering barriers to conversion
|A New Brunswick lawsuit ‘may well be the key to determining whether anyone actually chooses to go to a target-benefit plan,’ says Mitch Frazer.|
“The concept is simple, envisaging a shifting of some of the risks while preserving guaranteed benefits within a specific range,” says Mitch Frazer of Torys LLP’s Toronto office.
The difficulty, however, is that most pension standards legislation in Canada doesn’t accommodate single-employer target-benefit plans.
“Pension legislation generally prohibits reduction of accrued benefits outside of the multi-employer unionized environment and this would have to change as a key element of target-benefit plans is their ability to let benefits vary as a function of the funding status of the plan,” says Jana Steele of Osler Hoskin & Harcourt LLP’s Toronto office.
“In addition, federal tax rules would have to be amended and accounting guidance would have to be provided in order to facilitate the development of [target-benefit plans].”
Still, it’s not as if the movement toward target-benefit plans has been dormant.
New Brunswick’s shared-risk plan legislation for the public sector was the first to come into effect in December 2013.
“The New Brunswick plan addresses the volatility issue by focusing on robust risk management to promote benefit security and pension plan sustainability,” says Steele.
“Employers’ contributions, which can vary only within a pre-established range, are determined with regard to a prescribed minimum security level of funding that is set when the plan is established or when a benefit is changed.”
In April, the federal government released a consultation paper aimed at developing a legislative framework for target-benefit plans at Crown corporations and the federally regulated private sector.
Quebec is finalizing target-benefit plan legislation but only for the pulp and paper sector. British Columbia and Alberta still lack implementing regulations for their public sector legislation but have the necessary statutory framework in place. So do Ontario and Nova Scotia, although their legislation only allows target-benefit plans in unionized workplaces.
Saskatchewan’s regulator has taken the view that target-benefit plans are an option under the existing legislation; indeed, one of the police association plans in Regina recently converted to a target-benefit model.
“De-risking is a meaningful, live issue where much should happen in the next few years,” says Frazer.
But just how much will happen is uncertain given the polarization between employers’ desire to share risk and employees seeking the security of a defined pension after working towards it for a substantial period of time.
“You can’t say that what happened in New Brunswick will happen elsewhere,” says one veteran pension lawyer.
“The province was in crisis mode, and the unions had no option but to go along with the legislation.”
Even in New Brunswick, however, it’s not clear where the tale will end. Some 13,000 pensioners are challenging the constitutionality of the New Brunswick pension legislation, particularly the provisions that retroactively eliminate cost-of-living adjustments.
“Pensioners require as much financial certainty as possible as they budget for the end of their lives,” says Koskie Minsky LLP’s Ari Kaplan, lead lawyer for the applicants, in a press release.
“Before the Crown expropriates the retirement savings of older persons and redistributes their money to the public good to balance the budget, it must satisfy itself, through rigorous consideration of alternatives, that the policy is proportionate to its objective and there is no other rational policy alternative available.”
The pensioners allege the province ignored calls to study alternatives before it passed the amending legislation in December 2013.
Although the amendments were an effort to get pension liabilities off the government’s books, the former chief actuary of the Canada Pension Plan, Bernard Dussault, said in the press release that credit-rating agencies should view the new system of “conditional indexing” as an actual liability when assessing the province’s creditworthiness.
“I believe the province is inappropriately hiding its liabilities based upon unrealistic accounting measures which artificially restore the province’s credibility on the financial markets,” said Dussault.
All of the applicants have retired and are collecting pensions. Their average age is more than 70 and some 2,600 are more than 80 years old. The average pension is $21,053 annually with the payments previously indexed to the cost of living.
“The economy ebbs and flows and funding goes up and down,” says Kaplan.
“My concern is whether it is just to punish people who worked hard during the good times just because we now happen to be in the down cycle.”
The litigation could have a significant impact on the future of target-benefit plans in Canada.
“The suit is a landscape changer and may well be the key to determining whether anyone actually chooses to go to a target-benefit plan,” says Frazer.
“Even before we have a decision, the threat of litigation may deter many from going ahead with such a plan.”
From the legal profession’s perspective, de-risking should help alleviate the reduction in business stemming from the trend away from defined-benefit to defined-contribution plans over at least the last decade.
“If shared-risks plans proliferate, the legal work for pension lawyers will increase dramatically,” says James Pierlot of Toronto’s Pierlot Pension Law.
“In a [defined-contribution] plan, risk is transferred to the employees, but the plans are simple. A shared-risk plan is a complex one that employers and their consultants have to manage.”