Canadians, like many around the world, have watched from the sidelines as interest rates have plummeted and the markets have dropped significantly over the past couple of weeks, with a devastating toll on both personal retirement savings and employer-sponsored pension and other retirement savings plans.
Existing industry concerns about the adequacy of retirement savings in Canada will become more pronounced, with profound implications for both employers and employees.
For example, individuals with savings in registered retirement savings plans or other defined contribution plans may be re-thinking when they can realistically retire. In keeping with the proactive and measured approach our provincial and federal governments have applied thus far in COVID-19 relief strategies, legislators across the country may wish to consider relief options aimed at promoting the long-term sustainability of employer-sponsored pension and other retirement savings plans, in addition to measures that better allow for individuals to increase their personal retirement savings.
Measures that governments could consider as part of a pension and savings assistance package could include:
- Deferring or suspending DC contributions
In an effort to preserve liquidity and protect jobs where possible, governments may consider legislative relief to permit pension plan sponsors to temporarily suspend or defer contributions in DC pension plans. If such temporary relief were available, employers that may otherwise consider eliminating jobs or terminating pension plans due to current economic conditions and liquidity restraints may have another option. Should this measure be implemented, governments may consider appropriate protections for contribution amounts suspended under this type of relief.
- Deferred actuarial valuations for DB plans
Generally, pension contribution obligations in respect of a defined benefit plan follow the filing of an actuarial valuation report, which is prepared at a certain date. The AVR will determine the schedule of normal cost payments, as well as any solvency and going-concern special payments. Governments may consider introducing some flexibility to, for example, defer the effective date for AVRs that would otherwise be effective in 2020. This would prevent a plan’s funded position and consequent special payments from being determined at a time when the plan is suffering from the impacts of the market crash related to COVID-19.
- Maintain interest rates for solvency valuation purposes at pre-COVID-19 levels
In recent years, many jurisdictions, including Ontario, Quebec and British Columbia, have overhauled DB funding regimes to relieve employers of the funding and balance sheet volatility associated with solvency funding requirements. In Ontario and British Columbia, there’s no requirement to make solvency special payments as long as the plan is at least 85 per cent funded on a solvency basis, where new funding rules apply to a given DB plan. However, the determination of solvency funding relies on long-term interest rates, which have been affected by the COVID-19 crisis.
Long-term interest rate considerations are relevant because pension plan liabilities (future benefits to be paid) are expressed in present-day dollars; when interest rates decline, the estimated pension plan liabilities increase. As a temporary measure, governments may consider permitting the use of pre-COVID-19 interest rates for solvency valuation purposes. Alternatively, governments may mandate a re-evaluation of actuarial assumptions to reflect long-term expectations in respect of interest rates and to reduce the impact of carrying out a valuation when interest rates are at near historic lows.
- Relief from filing and other compliance requirements
For its part, Ontario’s pension regulator, the Financial Services Regulatory Authority of Ontario, demonstrated in a recent announcement that it will exercise flexibility in its supervisory authority in respect of day-to-day compliance. Among other things, it may permit extensions for filing deadlines and may forbear from levying administrative monetary penalties where plan administrators can’t comply with disclosure requirements.
While pension regulators in other jurisdictions may consider forbearing from certain enforcement actions in a similar fashion, this is an incomplete solution for a number of reasons, including that pension regulators don’t have the power to grant extensions to certain statutory requirements. Governments should therefore consider extending or suspending timelines to comply with regulatory filings, routine disclosures such as periodic member statements and certain other compliance matters.
- Raising DC contribution limits
Each year, the Canada Revenue Agency sets the annual contribution limits under the Income Tax Act for DC pension plans and RRSPs. Under these types of plans, the retirement benefit payable will be the total account balance at retirement — i.e., any contributions made, adjusted to reflect any investment earnings (or losses) and associated fees. In the past weeks, many individuals who are saving for retirement in these types of plans will have seen a significant drop in their retirement savings that could take years to recover from.
Those who are now, or in the future, in a position to replenish these losses would benefit from additional contribution room. This could be achieved by raising DC contribution limits, either on a temporary or permanent basis. For many years, there’s been criticism levied against the inequity of the tax rules related to registered pension plans, with a view that DB pension plans (which are increasingly rare particularly in the private sector) allow for greater accumulation of retirement savings than DC plans.
In addition, an increase to the DC contribution limits would complement the federal government’s decision to reduce the minimum withdrawal rate for registered retirement income funds by 25 per cent for 2020 in recognition of volatile market conditions.
- Permitting postponed retirement
Canadian workers are required to stop contributing to tax-deferred savings vehicles by age 71. In a report published this week, Actuarial Solutions Inc.’s Joe Nunes canvassed the idea of raising this ceiling. Similar to the above proposal for raising DC contribution limits, permitting Canadians to save over a longer period of time would facilitate individual financial recovery, especially since an increasing proportion of the population relies on capital accumulation-type plans for their retirement savings.
- Unlocking for financial hardship
Currently, pension standards legislation in some jurisdictions — including the federal jurisdiction, Ontario, British Columbia and Alberta — permit individuals to apply directly to financial institutions to access retirement savings from locked-in accounts, namely locked-in retirement accounts and life-income funds, if they experience financial hardship.
Unlocking of amounts held in pension plans on the basis of financial hardship isn’t permitted, and applications to unlock funds held in LIRAs and LIFs are subject to strict conditions, including that the applicant’s income for the year must be below a specified level. While we reinforce that locking in of pension amounts is a fundamental pillar of the retirement savings system and caution against blanket permissions for pension unlocking, governments may wish to consider time-limited and/or tailored exceptions that may make this option available to individuals who are hardest hit, or for those who may not be able to access relief from other sources.
Canadian legislators may be further encouraged to offer retirement savings and pension relief measures if U.S. Congress takes action on the proposals set out in a March 20 letter penned by retirement industry trade groups in the U.S.
Jana Steele is partner and department chair of Osler, Hoskin & Harcourt LLP’s pension
and benefits team. Olivia Suppa is an associate in the pension and benefits team.