It is easy to forget the great changes in retirement and benefit plans that have taken place over the last 50 years. When politicians began to realize the strength of public support for employee benefit improvements, major changes were made in both federal and provincial legislation.

The foundations of our modern health and pension systems were laid in the 1960s. Upon becoming prime minister, Lester Pearson declared 60 days of decision, during which the government promised to reform healthcare, the public pension plan and address other social issues that it said were neglected by the previous government.

Judy LaMarsh, minister of health and welfare at the time, promptly proposed the first version of a national contributory pension plan. After a few years of wrangling with the provinces and numerous revisions this proposal was translated into the Canada and Quebec Pension Plans, where it remains today.

Other federal retirement income measures were upgraded during this period. The Old Age Security Act of 1952 was amended by raising basic benefits and adding the guaranteed income supplement. As well, registered retirement savings plans (RRSPs)--first introduced in 1957--were improved by increasing the limits on allowable contributions.

The Canada Pension Plan was financed through employer and employee contribution in a pay-as-you-go system. The plan was never funded by government, except for a small working balance, because it was taken for granted that the contributions of employers and employees would increase as the plan matured and the ratio of beneficiaries to workers rose.

High birth rates in the 1960s changed all of this. Contribution rates had to increase much faster than those under original estimates. About three decades later, it was speculated that unless the contribution schedule was amended, payments to pensioners would exhaust the fund. In response, the plan was partially funded and redesigned so that the contribution rate (employer plus employee) would not rise above 10%.

Influenced perhaps by the long bull market, those controlling the plan's purse strings optimistically decided to include common stocks among investments. There has not been any change to the eligibility for pension age in Canada, although the U.S. is raising the age from 65 to 67. Incidentally, the U.K. is raising the age for women from 60 to 65 and in Italy the retirement age is increasing from 56 to 60.

While the governments of Canada and Quebec were setting up the public system, the provinces, starting with Ontario, moved to regulate employer plans. Ontario's pioneer Pension Benefits Act (1965) set the pattern for all other provinces. This example was soon followed in the U.S. by the Employees Retirement Income Security Act (ERISA).

At first, the Ontario Act required vesting after age 45 and 10 years of plan membership. The '45 and 10' rule does not seem overly generous today, but a common condition for vesting had been age 50 and 20 years service.

The common practice for vesting today is five years of plan membership with no age requirement. The Pension Benefits Acts across Canada also require funding of pension plans up to certain standards and for the allocation of assets upon the wind-up of a plan. These provisions became relevant when the ownership of pension surplus was hotly debated in the 1990s.

Many surplus ownership cases have come before the courts over the last decade, and they continue to do so. The old idea that since the employer is responsible for any deficit, it is entitled to benefit from any surplus was rejected by the courts. Gains are not mirror images of losses. In the early days, the employer's right to surplus, by reducing future contributions or even by cash withdrawal, was often taken for granted. Sometimes plan documents were altered in the employer's favour without administrators even bothering to obtain legal opinions or the consent of plan members. This attitude is now unacceptable.

The regulation of private pension plans in Canada has one major defect, and that is the variation between provinces. The U.S. does not have this problem as ERISA governs all employers who work in more than one state. In Canada, reciprocal agreements somewhat ease the situation, but it is still troublesome. Everyone agrees that more uniformity is needed.

Looking to health benefits, changes in plan design have been driven largely by cost pressures from prescription drugs. This expense has been offset, to some extent, by generic drug plans. Still, in the last 10 years, most employers have faced increasing group benefits premiums that have far outstripped their available budgets for salaries and total compensation.

Take Enbrel, for example. It was launched in 1998 to treat rheumatoid arthritis and currently costs about $17,000 per person, per year. Even at that price the manufacturer, Immunex Corp., is faced with restricting access to the drug as the manufacturing process is complex and it cannot keep up with the demand. Another example is Imitrex, a common migraine medication that costs nearly $10 per tablet. A migraine sufferer could take several pills throughout any given day when in pain.

The list of more effective and faster-acting but gentler drugs is growing as drug manufacturers rush new preparations to market in a bid to gain market share. The Canadian consumer is now faced with cross border advertising of drugs that may be misleading unless the exact treatment of the drug is clearly understood.

Certain new U.S.-based anti-inflammatory drug ads, for example, show retirees active in sports. The assumption by TV viewers is that the drug will bring back their youth and vitality. When requesting the prescription from their doctor, patients are not aware of the long-term effect on benefits plan funding.

Employers have also seen their disability costs from psychological illnesses climb. Stress-related absences from work and mental illness claims have risen right along with the hectic pace of business. William M. Mercer Ltd. estimates that last year, the direct cost of time off and disability benefits totaled 14.3% of payroll for the average Canadian organization. Lost productivity from absenteeism costs most large employers 8% to 10% of payroll a year. Ask any employer today what their No. 1 issue is with benefit plans and controlling dramatic annual cost increases is the resounding response.

Technology is also transforming the administration and design of pension and benefits plans. An important but little noticed event occurred this year in the Ontario legislature when the Electronic Commerce Act was given Royal Assent and came into effect on May 24, 2001. Essentially, the Act allows for contracts to be created electronically and for electronic signatures to be legally binding. The implications for large national and multinational employers are far reaching.

Now benefits enrolment and beneficiary decisions can be made and stored electronically and are legally binding. This is possible due to the development of a branch of cryptography called public key encryption. Essentially, a 'public key' is created and given out to any employee or company wishing to do business with the employer. Messages sent to the employer are encrypted using their public key, and can only be decrypted using an asymmetric private key, which is kept secret. The system provides a secure method of verifying signature and document transfers that has stood up to legal scrutiny.

A second significant advance in the last 10 years is the development and broad use of prescription drug cards. The information captured on the frequency, cost and volume of drugs purchased provides a basis for detailed drug utilization reviews. These reviews are widely used as a basis to make changes to plan design to control costs and identify abuses and questionable prescribing patterns.

More recently, the regulatory environment in Canada has been moving in a direction to mirror the U.S. The Canadian Institute of Chartered Accountants now requires private companies and not-for-profit entities to disclose any non-pension, post-retirement future benefits for retirees and employees on severance. These liabilities can be quite complex depending on the assumptions used. In most cases they will amount to a substantial figure materially effecting the income statement, and ultimately long-term position, of the employer. The regulations also apply to public sector employers, companies reporting in the U.S. and international companies with a foreign parent.

WINDS OF CHANGE

A second major change in the wind for Canadian employers is the introduction of fiduciary responsibility for defined contribution (DC) pension plans and group RRSPs. Currently, DC plans are subject to the duties of care--diligence and prudence as imposed under pension legislation and group RRSPs are outside the legislation. That will change to be more like the ERISA rules introduced in 1994 in the U.S. Under that legislation the fiduciary responsibility of sponsors of defined benefit plans is also extended to 401K plan sponsors.

In the U.S., the safe harbour provision provides employers with protection from lawsuits if they can demonstrate that they have given employees control, choice and communication in their investment options. It appears that in Canada no such provisions will be offered. Even if employees are informed of available fund choices and the potential results of making poor investment choices in a group RRSP, the employer may still face a lawsuit.

Another fundamental change in the pension and benefits marketplace is the re-organization of the insurance industry. The trends of demutualization and consolidation have produced a much smaller marketplace with larger firms. Gone are the days when a small- to medium-sized company could shop the benefits market for the best rates. Today, large insurers are fully accountable to shareholders and will walk away from money-losing propositions.

Employers are also concerned about avoiding costly litigation with former and current employees over healthcare and employment issues. In the past, employees were likely to be poorly informed regarding their rights under same-sex benefits regulations, pay equity legislation and constructive dismissal. There has been a recent wave of interest by employment lawyers in the healthcare benefits and pension area, and employers are advised to become familiar with the law and applicable benefits legislation. Above all, they must thoroughly document everything.

The rules prohibiting discrimination and protecting privacy have created further complications. Benefits plans must provide identical benefits for males and females, although insurance companies may price their annuities differently by sex. This is straightforward, but the picture has changed now that common-law unions and same-sex unions are so common. These factors and the high proportion of two-income families mean that the whole rationale for survivor benefits in pension plans is questionable.

Also on the legal front, the confidentiality of medical records has taken on new meaning with the introduction of privacy legislation. Insurers and employers are now restricted from disclosing any information concerning the medical health or claims of an employee or their families to third parties, unless they have consent from the individual to do so.

Of a more serious nature are the recent advances made in DNA testing with genome technology that can show a person's chance of having serious health problems. Canada has new federal legislation, which protects an individual's right to privacy of personal information, including the results of genetic testing.

But the law does not prohibit insurance companies from asking for a person's genome so long as the individual consents. If the applicant refuses and is denied insurance he or she could complain to the privacy commissioner and the case might end up in the courts. Group insurance plans have a non-medical limit, which is usually quite high. This means that no medical questions are asked except in the few cases where the insurance amount is above the limit.

If the privacy issue is carried too far, an employee who knows that he or she has the likelihood of developing a high-risk medical condition could take out a large life insurance or health insurance policy. The insured would act, in essence, as an insider trader, unfairly using information not available to the insurance company to his or her advantage. For these reasons a total ban on disclosure of genetic information could severely damage the insurance market.

Looking ahead, our social security system is bound to evolve further. Eventually the normal retirement age in both public and private pension plans will rise. People are living longer and living healthier.

It is ridiculous to think that most people are incapable of working after age 65, or that the purpose of pensions is to provide everyone with a decade or two of holiday for golf and other leisure activities. We will soon be short of younger workers to replace the retirees, and will need older employees to stay in the workforce.

Reform of the healthcare system is also urgent. It is needed to control escalating costs and to satisfy providers. Ontario is surveying healthcare workers, looking for input on how to provide maximum care at an affordable price. Some kind of rationing is essential--this mean limiting covered services or imposing user fees for those with incomes above a certain level. Strong opposition may be expected, however, particularly from those who consider two-tiered medicine an anathema--but reform is inevitable.

Employers will have more headaches than ever in the years ahead. The electronic evolution, emphasis on human rights, threats of lawsuits and the ever-growing number of regulations will present severe challenges.