Western Canada is collectively holding its breath, waiting to see how the future of pensions will unfold.

The energy-led economic boom has caused employment growth in almost all sectors in Western Canada. For employers in this region—particularly in Alberta—it has magnified concerns and challenges relating to attracting and retaining employees. Meanwhile, B.C. and Alberta are two of several provinces currently awaiting recommendations from expert panels convened to examine possible changes in provincial pension legislation and regulation.

The unique pension landscape of Western Canada can be broadly summarized as follows.

British Columbia: Many workers have jointly-trusteed and union-sponsored multiemployer pension plans.

Alberta: Corporations based in the province commonly have defined benefit (DB) pension plans that were closed in the 1990s and now offer a defined contribution (DC) plan for new employees. Contribution rates for DC plans are higher than the national average.

Saskatchewan: The provincial government moved from DB to DC plans in the 1970s, and other employers followed suit. DB liabilities are winding down.

Manitoba: The pension environment is mixed and perhaps more representative of the rest of Canada.

Regardless of the province, the type of plan chosen (DB, DC or a variant of the two) imposes different risk and funding considerations on plan sponsors, and has different retirement income implications for plan members.

Issues Facing Plan Sponsors

The 2008 Survey on Pension Risk, conducted by Watson Wyatt and The Conference Board of Canada, shows that the volatility of funding contributions continues to remain a top concern for DB pension plan sponsors across Canada. For DC plan sponsors, the most pressing challenges are providing plan members with adequate pension savings for retirement and ensuring that they receive adequate investment information and tools.

2008 Western Canada Report

The survey also reveals that both DB and DC plan sponsors are concerned about attracting and retaining employees. However, this concern is greater in Alberta than other provinces in the West—and the rest of Canada.

Likely driven by these concerns, the survey found that the HR function appears to be playing a larger role in pension plan design in organizations in Alberta and throughout Western Canada than in the rest of the country. Outside of the West, the finance function still has more influence on pension plan design in most organizations.

Changes Affecting Pension Plans

Pension plans are influenced by many different sets of regulations, guidelines and standards. Almost all of these will be changing in the near future, and the decisions that plan sponsors make in the coming years will depend on the outcome of those changes.

For example, proposals have been made to change corporate accounting standards to require plan sponsors to fully reflect the entire change in the funded status of their plans in profit or loss each year (mark-to-market accounting), with a possible exception for final average DB plans. In addition, the rules used by plan administrators and actuaries when calculating commuted values for DB pension portability benefits are also changing. If adopted, these changes will lead to lower commuted values to better reflect the theoretical value of a pension. They will also improve the reported solvency position of practically every pension plan in Canada and make past service buybacks, flexible ancillary benefits, and optional joint and survivor pensions more affordable to pension plan members who use this basis for administration.

Furthermore, the legislation governing pension plans will likely undergo considerable revision in the near-term as a result of the expert panels that have been convened in a number of jurisdictions. British Columbia, Alberta, Ontario and Nova Scotia are all in the process of reviewing their pension legislation. Any changes will have an impact on pension plans with members in these provinces.

Pension regulators in Alberta, B.C. and Quebec, and at the federal level, are currently at various stages of implementing regulations to allow plan sponsors to use letters of credit as partial security of pension benefits in lieu of solvency contributions. For some plan sponsors and certain types of pension plans, this could offer a partial solution to the ongoing problem of asymmetry between pension plan risks and rewards.

And, in November, the Supreme Court of Canada will hear the case of Elaine Nolan et al. v. Kerry (Canada) Inc. et al. (Kerry), which may clarify the employer’s ability to use the margins in DB plans to pay administrative expenses, take contribution holidays and fund contributions for a newly created DC category of members.

Finally, in 2009, Canadians will be able to begin contributing to tax-free savings accounts (TFSAs). Group TFSAs could soon become a valuable part of the total employee compensation package. In the long term, TFSAs will dramatically increase the overall limits on tax-sheltered savings and reduce the pressure on pension plans to maximize tax efficiency.

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