Defined benefit pension plan sponsors that are considering winding up their plans or converting them to another framework following the federal government’s super-priority bill have more innovative options, according to Mitch Frazer, managing partner at Mintz LLP, during the Canadian Investment Review’s 2023 Risk Management Conference.
Although Bill C-228, which received royal assent at the end of April, was designed to protect pension plan members, it comes with unintended consequences for plan sponsors and their members, he said.
The legislation creates a super-priority that requires DB plan sponsors to make special payments into a fund that will be liquidated in the case of any liability or solvency deficiency. Ramifications of the new legislation, which is set to come into effect in April 2027, are already reverberating, said Frazer, with DB plan sponsors worried about the effect it will have on their ability to access credit.
Currently, Canada has about 4.5 million DB plan members. In a recent report, the Association of Canadian Pension Management said the legislation could lead to a loss of pension coverage for up to a million Canadians. “The biggest issue here is that when a struggling company is seeking to borrow or bring in other sources of funding, it’s going to be very difficult for them . . . to essentially get funding during their most challenging times.”
Frazer said he believes the government will have to reverse the legislation in some way. “What will likely end up happening is there will be a situation where a company that [needs] to [be] bailed out by a financial institution won’t be able to,” he said, noting that, if the government deems the company too big to fail, it will have to foot the bill instead and this may incentivize lawmakers to walk back the legislation.
In the meantime, many innovative developments in the pension industry are aiming to make pensions more accessible, generate better returns and provide more opportunities for more Canadians to understand how they can participate in saving for retirement.
Indeed, target-benefit plans are based on a formula similar to DB plans but with fixed-rate contributions like defined contribution plans. Since they’re targeted, they aren’t guaranteed, the longevity risk is pooled, members typically won’t outlive their retirement savings and they’re lifetime payments, said Frazer, noting their flexibility encourages more organizations to launch a pension plan.
New federal legislation is also making these plans more affordable by allowing plan sponsors to adjust benefits and contributions to ensure a target benefit is met, removing a solvency funding requirement and ensuring all parties involved are able to participate in the design of the plan.
In September, the Ontario government introduced a permanent framework for target-benefit plans to create governance in funding policies that will ensure more communications for plan members and the filing of actuarial reports that would require a solvency valuation.
In its 2019 budget, the federal government proposed the introduction of variable payment life annuities, which consist of periodic payments based on pooled investment and mortality experience. Specifically for DC pension plans, VPLAs will allow members’ assets to remain in a pool after a beneficiary’s death so surviving members can remain part of the plan.
“They’re meant to optimize lifetime retirement income while ensuring members don’t run out of money and there’s no direct risk for providers,” said Frazer. “This, in my view, has been really one of the best innovations over the last few years.”
The pooling structure of VPLAs will reduce concerns about income security and psychological stress for many DC plan members. “In Toronto, where I’m from, we now have more people over 65 than under 18. Aging has become an important top-of-mind issue for most Canadians and pension plans are an important element of the aging process.”
Pensions are the biggest social issue in society and will continue to be over the next 10 years, added Frazer.
Read more coverage of the 2023 Risk Management Conference.