Bill C-9: Seeing change

It has been more than 20 years since the last significant rewrite of pension legislation in Canada. Now, following a transparent process involving expert commissions, discussion papers and industry consultations, we are finally seeing the first waves of reform—in Ontario and the federal jurisdiction—breaking over the pension industry.

Hard on the heels of Ontario’s Bill 236, on March 29, 2010, the federal government introduced Bill C-9 for first reading—the first in a series of reforms to come. Should it pass, Bill C-9 will make some changes that should apply to all registered pension plans, whether federally or provincially regulated. For instance, it will amend the Excise Tax Act to provide a new uniform GST/HST rebate system that will apply to employer-sponsored pension plans.

Further, Bill C-9 will raise the surplus threshold under the Income Tax Act to 25% from 10%, beginning with 2010 current service contributions. This will allow a greater amount of employer contributions to be made to defined benefit (DB) pension plans. In this regard, the government is following the recommendations of several expert commissions, which found that the upper surplus limits need to be increased to allow DB plans to build up a buffer against future economic downturns. However, the expert commissions also heard from the pension industry that employers are unlikely to build up surpluses in DB plans unless and until the issue of ownership of, and access to, surplus is better clarified in legislation. So far, pension reforms have not addressed this thorny issue.

Bill C-9 also proposes to make a number of significant amendments to the federal Pension Benefits Standards Act (PBSA).

In the area of funding, Bill C-9 will:
• allow letters of credit in lieu of solvency funding payments (up to certain limits);
• prohibit amendments that would reduce a plan’s solvency ratio below a prescribed level; and
• give the Superintendent (OSFI) a broad discretion to require filing of additional actuarial valuations and to appoint actuaries for a plan.

For plan terminations, Bill C-9 will:
• eliminate employer-declared partial terminations; and
• require employers to fully fund pension benefits on plan termination.

For benefit entitlements, Bill C-9 will:
• provide for immediate vesting of benefits but permit employers to retain the two-year waiting period to join the plan; and
• permit defined contribution plan members who are entitled to an immediate pension to elect to receive a “variable benefit” (similar to a life income fund).

While less ambitious in scope than Ontario’s Bill 236 (which received Royal Assent on May 18, 2010), Bill C-9—when coupled with the federal government’s pension proposals announced in October 2009—gives a strong indication of the direction future pension reforms will take.

It appears pension reforms will aim to strike a balance between protecting member benefits, while attempting to allow plan sponsors funding flexibility to keep DB plans affordable. For instance, changes such as the permitted use of letters of credit for solvency funding provide funding flexibility but are combined with new powers given to the regulator to order valuation reports and the requirement to fully fund on termination. Both of these could result in significantly higher funding obligations for plan sponsors.

Many of the Bill C-9 reforms will require amendments to the Pension Benefits Standards Regulations before they can be fully implemented. Plan sponsors and administrators should also keep in mind a number of items previously announced by the federal government that were not included in Bill C-9. Many of these items (e.g., implementing a new solvency funding standard and clarifying the responsibilities of plan sponsors) appear to require separate amendments to the PBSA.

While the full impact of federal pension reform will not be entirely clear until it has been completed, the federal government is moving ahead with its promise to reform pension legislation. Early indications show these reforms will have significant implications for plan members and sponsors alike. BC

Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP. plitner@osler.com
plitner@osler.com

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