Budget proposals for retirement security get mixed reviews from ACPM

The Association of Canadian Pension Management has mixed feelings about the federal government’s proposed methods for enhancing retirement security in the wake of the high-profile Sears Canada Inc. bankruptcy last year.

During an ACPM webinar last week, Todd Saulnier, the chair of ACPM’s national policy committee and a principal at Mercer, said some of the federal government’s options could be helpful on the surface, but could also lead to unintended consequences, such as weakening pension plan sponsors or making it more difficult for employers to sponsor a defined benefit plan.

“Any measure that would push even more corporations to abandon their DB plans would effectively reduce retirement security rather than enhance it,” he said.

Read: Budget 2019: Proposed changes to pension legislation, annuities, CPP

In its consultation, which began in November 2018 and wrapped up in January 2019, the federal government proposed four changes to pension legislation and other corporate governance and insolvency options to address the risk to pensioners and retirees when an employer goes bankrupt.

Saulnier noted the pension-specific proposals would only affect companies in federally regulated industries. Both Sears and Nortel Networks Corp., another headline-grabbing bankruptcy, didn’t fall under that banner.

The proposals looked at creating solvency reserve accounts, offering special funding relief to struggling employers, allowing individual pensioners and survivors to choose a lump-sum payment instead of a lifetime annuity and, for indexed pensions, separating the base pension from the ancillaries to allow sponsors, administrators, employees and unions to define the priority of assets in the event of a plan termination.

Saulnier said the ACPM is, as a general rule, very supportive of reserve accounts, because they can address the asymmetry of pension funding and encourage employers to invest more in a pension plan in good times, knowing they can draw on the reserve fund in bad times.

Read: N.S. pension legislation changes include new reserve accounts

The association is also supportive of the special funding relief proposal, though it had some reservations, he said. Creating sponsor-specific regulations has seen some success in the past; however, a distressed pension workout scheme could present significant challenges, including the requirement for a public declaration that companies would need in order to apply for the measure, as it could render the option not available to some employers, he said. 

Further, allowing individual pensioners to select a lump-sum option could reduce retirement security, said Saulnier. Individuals who select the option could face hefty income taxes on their lump-sum amount, under rules in the Income Tax Act that limit the size of tax sheltered lump sums per dollar of pensions. He also noted pensioners could face challenges managing their own assets in their old age, due to increased risk of cognitive decline, fraud and elder abuse.

In the case of the group that chooses a lifetime annuity, they could face higher annuity prices from insurance companies, added Saulnier.

As for the indexed pension proposal, he said the ACPM isn’t sure if the option would improve security for pensioners and retirees, but it could significantly soften the immediate impact of a terminated plan.

While Saulnier would have liked to see more focus on those measures in the 2019 federal budget, he noted it did include some proposals that could be helpful.

Read: ACPM supports strengthened going-concern pension funding rules in B.C.

Also speaking during the webinar, Raj Sahni, a partner at Bennett Jones LLP, said the federal government’s corporate governance and insolvency proposals had “vague concepts and feel good language” but wouldn’t enhance retiree protection.

The budget proposed amendments to the Canada Business Corporations Act requiring companies with large pension deficits to restrict executives compensation packages, share redemptions and dividends. Sahni said limiting executive compensation wouldn’t offer substantive additional protection and could be problematic because it may drive talented executives away from a struggling business when they’re needed the most.

The CBCA proposal could also limit Canadian subsidiaries’ ability to receive equity infusions from international parent companies, said Sahni, since the parent would be unable to receive paid back dividend or share redemptions. Also, it would only cover federally regulated corporations.

He also noted the federal government failed to define a large pension deficit and whether it would be defined in relation to company-specific factors such as size, cash flow and ability to deal with debt obligations.

Read: Ontario’s proposed DB funding rules lack solvency reserve accounts: PIAC

The budget also proposed introducing a concept into the CBCA that a company’s directors must act in good faith to ensure its success for all its stakeholders, with a specific mention to pensioners and employees. “This is not really a new concept at all,” said Sahni. “It doesn’t add anything substantially to the existing fiduciary duties and arguably introduces confusion.”

A 2004 Supreme Court of Canada decision already outlined the responsibility of directors, said Sahni, by ruling they must act in the best interest of the company as a whole, and don’t owe an elevated duty to creditors in the event of bankruptcy.

“It seems like [the federal government is] trying to create some sort of priority without actually saying it,” said Sahni.