The philosophy behind pensions and benefits in Western Canada is shaped as much by regionalism as it is by new legislation and political will.
By Greg Hurst and Dorn Smith
Canadians often identify themselves by the region of the country they come from. This is especially true in Western Canada, where the geographical distance from the seat of Canada’s federal government and equity markets makes regional identity even more important.
Westerners also have a different take on the way in which pensions and benefits are created for their workforce. Issues such as Alberta’s “Third Way,” the nature of the resource economy and recent pension legislation amendments all make Western Canada’s approach to pensions and benefits unique.
In this second installment of BENEFIT CANADA’s Report on Western Canada, the intention is to update readers on the diversity within pensions and benefits in Western Canada.
THE WESTERN CANADIAN CONTEXT Western economies are heavily resource-based with forestry, oil and gas, agriculture and mining, and valueadded manufacturing of primary resource products being the main drivers.
With the exception of resource-processing businesses, much of the activity in these economic sectors is driven by small- and medium-size businesses. Thus, Western Canadian businesses tend to be strongly entrepreneurial, which is reflected in their pensions and benefits programs.
These programs seem to have larger defined contribution(DC) aspects in both pensions and benefits program components. Health Spending Accounts(HSAs)are growing significantly in popularity in Western Canada and capital accumulation plan designs dominate as preferred format for retirement programs. These trends are driven by both the organizational philosophy and by the size of the organizations.
The economies of Western Canada, and particularly those of B.C. and Alberta, feature pronounced “boom and bust” cycles. Currently, there is a strong boom, fuelled by the prospect of the 2010 Winter Olympics in Vancouver(tourism is B.C.’s second largest industry), and the rosy prospects rising fuel prices have generated for Alberta’s economy. These conditions have fostered a more mobile workforce, and therefore greater interest of employers in the flexibility provided by DC pensions and benefits program designs.
MERGERS AND RECRUITMENT In tandem with “boom and bust,” one of the ongoing challenges common to the western provinces is the degree of merger and acquisition activity, particularly in the resource sectors of forestry, mining and oil and gas. This activity means that organizations and benefit programs can be of a short-term nature. This presents challenges for organizations, including those of: • predicting claims costs; • managing increased stresses on employees; • amortizing plan start-up costs for both the carrier and the consultant.
A different approach by plan advisors and carriers is required to manage programs in these industries as a result. Possible solutions may include the establishment of multiple employer plans such as those used in the construction industry, or the set up of terminal funding agreements if plans are terminated in, for example, less than three years. For employee well-being, employee assistance programs and transition career and personal counselling may also be employed.
Another challenge in the West is the shortage of employees (skilled or otherwise)—likely the biggest one faced by organizations in the near future. Benefits programs will need to be modified to address this challenge to effectively meet employee expectations in more competitive labour markets. Costs of benefit programs may be secondary to the the recruitment/retention challenge.
This area is complicated by the nature of the workforce itself. A multi-generational workforce has replaced the homogeneous nature of the baby boom workforce, where each generation has different needs and expectations of the workplace. Options here for benefits programs will be in the areas of flexibility and expansion of choices in benefits(e.g. wellness alternatives).
The bigger answer to the recruitment/retention challenge will be the development of a supportive management culture in organizations including mentorship and career development opportunities for employees.
HEALTHCARE AND CHAOULLI All provinces must harmonize their healthcare delivery with the requirements of the Canada Health Act, but there is much diversity amongst provinces in the details of implementation and benefits.
As in the rest of Canada, Western provinces change benefits provided by the government healthcare schemes on a regular basis. These changes usually require sponsors to modify their programs to maintain integration with the government plan. To the extent that benefits managers may expect more changes arising from the Chaoulli decision, they might look to Alberta as a leader in such changes. Alberta, politically and psychologically, is among the best prepared of the Canadian provinces to embrace Chaoulli.
In July 2005, Alberta presented its overall strategic plan for what the government terms the “Third Way”—seemingly a blend of public and private healthcare.
The Third Way aims to discover creative ways to deliver effective healthcare in a more cost-effective manner. It may significantly impact the design and costs of employer extended healthcare plans(see “First steps,”).
B.C. also has an initiative under way for renewing primary healthcare for patients. This initiative also aims to reduce dependency on GPs and increasing wellness programs. Saskatchewan is in the fourth year of its Health Action Plan. This plan seems to focus on increasing the number of physicians and nurses available in the province. Manitoba, on the other hand, still seems to be comparing its healthcare delivery with delivery mechanisms in other parts of the country.
DEVELOPMENTS IN GROUP BENEFITS Plan sponsors can expect requirements to implement program changes as a result of changes in public healthcare. That is because health plans have always had to react to changes in provincial healthcare plans. An increasingly common response in Western Canada is a shift from the traditional defined benefit(DB) approach for funding group benefits to a greater emphasis on the DC approach, or HSAs, for at least some benefit program components.
Under a DC funding model, there is less need to modify plans to integrate with changing provincial programs since the benefits are not specifically defined in HSAs. Especially with the uncertain future changes in provincial health plans and the history of delisting benefits, HSAs— with their set amount and freedom of choice in healthcare spending—make sense from a proactive perspective in plan design and cost containment.
Wellness programs in organizations also continue to gain momentum in Western Canada. There is a growing belief that programs tailored to the specific health issues in an organization will have long-term value in containing the increasing costs of disability and extended healthcare plans in particular.
Although there is still little research on the long-term financial impact on organizations of these programs, the willingness of organizations to embrace them reflects the entrepreneurial business cultures in Western Canada.
PENSION REGULATORY DEVELOPMENTS Legislators in Canada’s Western provinces have been busy making changes to pension legislation in 2005, as both Manitoba and Alberta have introduced significant changes to their pension standards acts. Among the most significant developments are Manitoba’s trend of unlocking pension funds, following on Saskatchewan’s lead in 2002; Saskatchewan’s extension of creditor protection to individual registered plans(RRSPs and RRIFs); and Alberta’s move to enhance transparency for plan members while conferring greater powers upon the superintendent.
Highlights of other regulatory developments, east to west, are as follows:
Manitoba The Pension Benefits Amendment Act, which received Royal Assent on April 19, 2005, includes the following provisions: one-time unlocking of 50% of locked-in funds by way of transfer to an RRSP or RRIF; immediate vesting; administration of a plan by a pension committee if there are a prescribed minimum number of plan members(expected to be 50); compulsory membership after a maximum of two years of employment; harmonization of survivor pensions to 60%(from two-thirds); and permitting payments for phased retirement.
Saskatchewan The Pension Benefits Amendment Act, 2004, which was proclaimed June 1, 2005, allows the: extension of survivor pension requirements to apply to service prior to 1994; flexible pension plan provisions; and extension of creditor protection to voluntary registered plans(e.g. RRSPs and RRIFs).
Alberta The province now requires filing of more information about the financial status of pension plans. It is also strengthening the enforcement powers of the superintendent and increasing plan member access to pension plan information to improve transparency and accountability to pension plan members.
British Columbia The B.C. Court of Appeal has released its decision in the case of Butler Brothers Supplies v. B.C. Superintendent of Pensions. The case involved the proposal of Butler Brothers to utilize a letter of credit to make up a solvency deficiency in its DB pension plan. The Court ruled against the appeal by Butler Brothers on the grounds that the B.C. Pension Benefits Standards Act proposal was not sufficient to address the requirements of the Act for the employer to make solvency payments.
The volume of pension regulatory initiatives in Western Canada in 2005 is remarkable in light of the dearth of significant developments elsewhere in Canada—with the exception of the pension standards overhaul carried out by Québec in 2000. Other than tinkering with DB funding standards, few other Canadian jurisdictions seem to be moving towards major regulatory changes.
These recent regulatory changes underscore fundamental differences between Western Canada and Central Canada in the pensions environment. Western Canadian politicians and regulators generally have not had to deal pension challenges similar to those faced by their Central Canadian counterparts, such as Stelco and Air Canada.
Western Canadian businesses in general are smaller and so are their pension plans. There are also relatively fewer DB plans. Therefore, the consequences of any particular case of DB underfunding are not likely to be of the same magnitude in terms of the sums involved or the numbers of members affected. This gives Western politicians the ability to review pension standards without the added political dimension of crises that focus public attention on issues that may become, or are, contentious and emotionally charged.
Remarkably, Western Canadian regulatory changes have not involved DB funding standards. Although sponsors of DB plans in Western Canada are by no means immune to the “pension funding crisis” affecting other plans in Canada, there is relatively little friction between plan sponsors and regulators in this area. To the extent such friction exists, it is primarily focused on solvency standards.
These developments suggest Western Canada is emerging as a centre of influence for new ideas in pensions and benefits. The entrepreneurial foundations of Western Canadian business, together with political environments often characterized as “radical” with respect to healthcare issues, and “quiet” in regards to pension issues, provide a willingness to embrace new ideas and approaches in both the benefits and pensions arenas.
Greg Hurst is the manager, pensions and Dorn Smith is a senior consultant, Heath Benefits Consulting in Vancouver. firstname.lastname@example.org, email@example.com.