Financial hardship is hitting employers across Canada and they’re starting to make difficult choices around cost-cutting measures within their businesses.
“Some plan sponsors may be considering changes to their plan design to address these cost concerns during these turbulent times,” said Jana Steele, partner and department chair of the pension and benefits team at Osler, Hoskin & Harcourt LLP, in a webinar hosted by the law firm on Monday.
Pension plan sponsors will have to tread carefully to stay on the right side of the law. “Today, no Canadian jurisdiction has passed or initiated any legislation that has absolved plan sponsors of their funding obligations under pension plans due to financial hardship caused by the COVID-19 pandemic,” said Omar Sunderji, an associate in the pension and benefits team at Osler. “As a result, employers are required to continue to make contributions to their pension plans in a normal course, in accordance with applicable law and the terms of the plan.”
The options available for plan sponsors seeking to make adjustments will vary considerably, with defined contribution plans seeing a clearer path to immediate solutions, he said. “Under DC plans, the plan can be amended to reduce the level of employer contributions on a prospective basis — for example, by reducing any required employer contributions or employer matching contributions.
“We understand that certain pension regulators have an unpublished position that they would accept the suspension of contributions under the circumstances. If this type of change is being considered, we would recommend discussions with the pension regulator for your plan to ensure they would similarity accept this type of change.”
Under current tax rules, DC plan contributions are required to remain at at least one per cent, noted Sunderji. “However, we understand the Canada Revenue Agency is waving this requirement and is working with Finance Canada in this regard.”
He said plan sponsors can look for an update on the ‘What’s New’ section of the CRA website in the coming days.
Plan sponsors looking at more drastic measures, such as plan termination, will have to tread carefully since the rules around the process are highly prescriptive, he added.
As for defined benefit plans, administrators should make sure they’re aware of their next valuation date and touch base with their actuary to suss out the best options, said Sunderji. “It may be worth considering the possibility of a valuation date pre-pandemic, which may provide the option to lock in pre-crisis interest rate assumptions and avoid using depressed asset values.”
For target-benefit or shared-risk plans, employer options depend on the jurisdiction, he noted. And generally, plan design triggers for benefit adjustment are established at the outset of the plan. “In the current circumstance, the administrator may be faced with taking action to reduce benefits under the applicable funding policy.”
“For New Brunswick’s shared-risk plans, because of the nature of the regime, there has to be a failure funding test in two consecutive valuations in order for steps under the funding deficit recovery plan, which includes potential benefit reductions to be mandated.”
When making plan design changes, plan sponsors have to keep abreast of any application statutory requirements they may trigger, such as member notification requirements. “These types of plan design changes would typically be considered to be adverse and must be disclosed to impacted members,” said Sunderji.
Overall, when considering any pension plan design changes, employers must take care to ensure the amendment complies with legislative requirements. Normally, Canadian pension standards legislation prohibits amendments that would reduce benefits that have accrued before the effective date of the amendment. “There are certain exceptions to this rule,” he said. “For example, federally regulated plans can amend accrued benefits where authorized by the federal regulator.”
Plan sponsors must also consider the terms of the plan documents to make sure an amendment isn’t prohibited. And they have to consider any collective bargaining terms that might limit their ability to make changes without the union’s consent.
“For non-unionized employees, a reduction to pension entitlement could be grounds for constructive dismissal claims, particularly if combined with other adverse changes to their compensation and benefits,” said Sunderji. “We would recommend speaking with your labour and employment law counsel if you are considering reductions in overall benefits packages or compensation for your employees.”