In a letter to the Canada Revenue Agency’s registered plans directorate, the Association of Canadian Pension Management said a new draft bulletin only covers a concern attached to smaller pension plans and shouldn’t apply to larger, employer-sponsored plans.
The ACPM said it recognizes the agency’s efforts in providing guidance on apportioning assets and actuarial liabilities in actuarial valuation reports for the purpose of funding the defined benefit provisions of a registered pension plan that has more than one participating employer. However, it noted this concern is “only one that attaches to smaller pension plans wherein inappropriate tax deductions or movement of funds between employers or connected persons may arise.”
As a result, the letter said the bulletin should be limited to just those plans, excluding trade- and union-based, multi-employer pension plans and jointly sponsored pension plans.
While the bulletin outlines different methods of apportioning assets and liabilities among participating employers, it doesn’t address the policy and administrative differences among single-employer pension plans, stated the letter.
“When considering the administration of a SEPP in the context of a large group of related companies, it is often the case that one company may essentially act as a guarantor of the pension plan. This can result in one company paying more into the plan compared to the other participating employers. Accounting for the plan, however, is done on a consolidated basis.”
In addition, when considering a conglomerate of employers, the assets and liabilities of a plan may not be reflective of the obligations of each participating employer, it said, noting that applying the methods outlined in the bulletin will result in a considerable amount of burden on participating employers to account for their assets and liabilities, which may inadvertently illustrate a bias towards the guarantor company.
“A way of distinguishing the above noted plans and excluding them from the application of the bulletin would be to limit the bulletin’s application to pension plans that either qualify as individual pension plans or whose participation include connected persons.”
In terms of the issues associated with the application of the bulletin from a MEPP or JSPP perspective, the letter said the bulletin appears to ignore these pension plans’ policy implications and the resulting administrative realities.
Specifically, it noted the concept that assets and/or liabilities should be apportioned separately, per participating employer, contradicts the fundamental nature of MEPPs and JSPPs — which are collectively funded arrangements among many participating employers with no employer liability beyond fixed required contributions while the plan remains ongoing and no terminal funding obligations if the plan was to ever windup.
“Apportioning assets and liabilities among participating employers of a JSPP calls into question this central tenet of MEPPs and JSPPs,” said the letter. “Employers participate in MEPPs and JSPPs on the basis of fixed and negotiated costs that are a set percentage of payroll and that financial risk will be shared among all employers and members — and further, that there are no funding liability obligations were the MEPP or JSPP to ever windup.
“Apportioning assets and liabilities to each employer contradicts the fundamentals of the JSPP funding model and suggests that employers have individual liability to the plan beyond their ongoing contribution obligations, which is not the case.”
The ACPM also noted that requiring employers to apportion assets and liabilities will create administrative challenges, since apportioning assets among participating employers will be a costly and onerous task that will require a significant amount of time and resources, particularly where a plan includes hundreds of different employers.
“We recognize the intention of the bulletin, which is to ensure any unfunded liability associated with a participating employer and related employer contributions are not excessive. While the apportionment methods in the bulletin seek to ensure that there is no unequal cost-sharing among employers, we note that the bulletin, in its current form, will place a considerable burden on employers to ensure their compliance with its requirements.
“However, where employers are related and whose balance sheets are consolidated, there is no net gain from such an additional requirement. The use of generally accepted accounting principles and existing tax laws on the flow of funds between related employers is more than ample to address any concerns in this area.”
In the ACPM’s view, an alternative approach to applying the bulletin would be to explicitly limit its application to pension plans wherein applying generally accepted accounting principles perspective can’t be assured. As well, the letter noted that the intention of the bulletin doesn’t apply to MEPPs and JSPPs since their funding model is primarily based on the notion of equal cost-sharing among all.
“And given the MEPP and JSPP funding methodology, this is fully achieved without apportioning assets and liabilities among participating employers which, in most cases, are unrelated employers.”