©  Copyright 2002 Rogers Media. The following article first appeared in the March 2002 edition of BENEFITS CANADA magazine.

This plan fails to meet the investment diversification requirements under the first proposed reform because it does not offer a range of options.

Risk would be most pronounced in cases where employees who buy and hold stock suffer a loss due to the stock declining in value. The employer faces a possible breach of duty and liability issues in this instance. This outcome would be appropriate if the plan in question is a group RRSP, but inappropriate if it is an employee stock purchase plan. If the same employer offered additional DC plans with diversified investment options, would it then meet the diversification requirements under the proposals? The answer is unclear.

The second scenario involves a group RRSP offering GICs, a diversified selection of funds spanning all asset classes and geographic regions, and employer stock currently outperforming the index.

The organization's stock option does not comply with the investment rule requiring diversification within each investment option under the fourth proposed principle. To protect against potential liability, the employer can eliminate its stock as an investment option. But this is not a good solution because employees lose the ability to participate in the financial growth of their own employer. It is possible that the GIC option would also fail to meet the criteria of the proposed reforms.

FUTURE OF STOCK OPTIONS
Given the issues raised in these scenarios, it is questionable whether employer stock has a future under a new regulatory regime. In fact, the liability issues raised may discourage stock-based plans entirely. In the extreme, employer funding of these plans may be converted into straightforward cash compensation, which could ultimately disappear entirely. In the long run employees' ability to build retirement income would be jeopardized.

Clearly, employer stock should not be the only retirement savings option open to employees. The perils of high concentration in employer stock have been abundantly demonstrated by the Enron Corp. case. Persuasive and valid arguments can certainly be raised for reasonable use of employer stock, though.

Given that some important DC plan realities are not reflected in the proposed changes, and that the future of some plans may be jeopardized, the proposed principles need to be revisited.

Regulatory reforms are needed. But they should recognize that some plans are simply not oriented towards retirement saving. In addition, reforms should recognize that diversification can be achieved through multiple DC plan offerings.

Those plans geared towards providing retirement income should be subject to regulations that allow reasonable use of employer stock. Regulations could limit use of employer stock in several ways such as establishing a percentage ceiling. Employers could then offer matching contributions in stock.

Overall, the proposed regulatory reforms are valuable. But revisions are required. The principles should be modified to support--rather than curtail--the evolution of DC plans, while prudently protecting the interests of investors and employers. BC

Ron Sinnaeve is the manager of integrated business solutions with Canada Life in Toronto. ron_sinnaeve@canadalife.com.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."