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©Copyright 2001 Rogers Media. The following article first appeared in the December 2001 edition
of BENEFITS CANADA magazine.
Regulatory burden
Shirley McIntyre was asked to present the DC plan sponsor's view at a Canadian
Pension & Benefits Institute conference in Banff last month. The regulators got
an earful.
During the mid-1940s to the mid-1960s, the growth of employer
pension plans in Canada was phenomenal. While these plans were clearly designed to
secure retirement income for employees, they were much less effective than they
appeared to be. Criticism grew over the loss of pension rights among terminated
employees. When employees changed jobs they lost their pensions because vesting
provisions were inadequate. Even where vesting provisions were sufficient, employees
could take cash refunds of contributions.
Pension regulation was born out of this era, with Ontario
passing the first Pension Benefits Act in 1965. Other provinces followed suit. The
purpose of regulation was to improve the security and delivery of the pension
entitlement for employees. More specifically, pension legislation was designed to
address the issue of vesting. Yet, almost 40 years later, we do not have
consistency among the provinces on that provision.
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"Companies do not
have to offer a pension
plan to employees.
Yet those that do
are punished by the
regulatory environment."
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While the objective of the regulations has remained
consistent over the years, the legislation certainly has not. As organizations grew
their businesses beyond a single province, the complexity of pension regulations
grew too. Rather than a single 100-page Act to manage, there were nine, plus one
for federally regulated plans. None of these Acts were consistent when they were
first drafted decades ago, nor are they today.
Plan sponsors marvel at the inability of provincial
legislators to agree on even the simplest concepts, such as what is a small pension
and what is the definition of a spouse. At the same time, we are eager to see some
clarification and consensus around the big issues such as surplus distribution and
contribution holidays. We would also appreciate some advice and guidance on defined
contribution (DC) plan member education and communication--advice that is
respectful of reality. Instead, we are faced with a barrage of meaningless
mini-changes.
At TransAlta, the first pension plan was a simple money
purchase arrangement through the Government Annuities Branch of the Department of
Labour. In 1954, the company implemented its own plan with a board of trustees. The
plan documentation was just 12 pages in total. The booklet for employees was a
simple, little six-pager that was incredibly clear.
Our current plan document is a whopping 102 pages. There have
been dozens and dozens of changes to this document over the years. Each change
requires a review of the entire document. Articles that were previously approved
are suddenly questioned, and correspondence goes back and forth on interpretation
and wording changes. Not surprisingly, approval takes months to obtain.
We employ consultants, actuaries and lawyers to help us
understand pension legislation, to write our pension plan documentation, to file
the necessary returns, to meet the government-imposed requirements and to determine
the funding status of the plan. We hire accountants and then auditors to crunch the
numbers. We rely on communications specialists to take the carefully crafted words
from the plan documentation and turn them into something that employees can
understand, and may even be enticed to read.
The cost of all of this is enormous and it is growing. If the
cost is considerable for a large employer, like TransAlta, can we reasonably expect
small employers to offer pension plans? Surely the costs are prohibitive.
The average employee who is being protected by the carefully
worded and regulated pension plan document cannot understand it. These plan members
need a lawyer to interpret the text. Do we have better plans because of this
complexity? I think not. Rather we are overwhelmed by administrative work,
sometimes to the detriment of establishing a good plan design. Do plan members need
to be better protected? No. They need to better understand their pension
plan.
UNSETTLING TREND
We have lost sight of the objective of protecting members. At many companies,
employees earn an attractive salary, they have a comprehensive benefits package and
they have a pension plan. Pensions make up about 10% of total compensation. This
means that 90% of employee compensation is not legislated. Why, then, is it so
important that the 10% that comprises pensions be so highly regulated?
Companies do not have to offer a pension plan to employees.
Yet those that do are punished by the regulatory environment. Statistics Canada
information indicates that between 1970 and 1998 the percentage of employees
participating in pension plans has decreased. Of more significance is the decrease
in private sector pension plan participation.
Could it be that employers look at the massive amounts of
work involved in operating a pension plan and choose not to offer one? Could it be
that the very legislation that was enacted to protect employees has had the
opposite effect--and that many people will simply not have pension benefits? In an
attempt to simplify their lives, plan sponsors have chosen to implement DC plans,
including group registered retirement savings plans. Now legislation, regulation,
guidelines and standards are being discussed for these plans.
It's easy to complain, but we have an alternative. In fact,
there's been some discussion of uniformity. That is, one great piece of legislation
to understand and administer, one text covering all employees across Canada. This
could be a great idea, but it could also turn into a hodgepodge of legislation put
together to appease many political agendas ensuring that all jurisdictions have won
something.
POSITIVE STEPS
Perhaps we are turning a corner when it comes to legislation. The Canadian
Association of Pension Supervisory Authorities (CAPSA) has developed a pension
governance guideline. It's not perfect but it is a start. Here are some other
solutions:
1. Let's work towards uniformity.
2. Let's encourage CAPSA to continue to work with plan sponsors and unions
and do so before the first draft of its report is published. We are reasonable. We
are not the enemy, and our employees are not hard done by.
3. Let's work together to develop some solid principles and objectives of
plan design.
4. Let's develop some minimum guidelines based on the requirements of the
current pension acts (minimum funding, vesting provisions, membership, education
and communication for DC members).
5. As plan sponsors and union representatives, let's make a meaningful
contribution to regulatory change at the beginning of the process, rather than
complaining about it when it's done.
6. Let's ensure that guidelines are clear and that we can be assured of
common interpretation. Perhaps we can develop some simple disclosure process so
that changes can be monitored.
7. Let's spend our scarce resources on refining plan design and education.
Let's not develop huge new bandages for tiny little scratches.
8. Let's develop appropriate responses to help sponsors and members deal
with tough issues such as surplus, governance and fiduciary responsibilities.
9. Let's not punish good plan sponsors with effective plans. Rather, let's
identify the few ineffective plans and try to change them.
10. Let's help employees who need protection and who have, in fact, been
treated poorly.
11. Let's reduce the work of our politicians (who don't understand this
stuff anyway) so that they are not passing pension legislation, but rather dealing
with more important issues (yes, there are more important issues).
12. Let's trust each other to do the right thing.
Our companies expect simplicity, flexibility, change, quick decision-making,
reduced bureaucracy and we should expect nothing less from the regulators.
BC
Shirley McIntyre is director of pensions with
TransAlta in Calgary. shirley_mcintyre@transalta.com.
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