Atlantic Canada is a place of rugged beauty, where resources are abundant but nature doesn’t hand them over freely. Whether it’s the Lower Churchill Falls Hydro development deep in the forests of Labrador or Hibernia’s oil under the Grand Bank, access to these natural resources requires huge investments and an appetite for risk.
Most of the mega-projects under way or proposed in this region are related to these rich resources. While Newfoundland and Labrador continues to see increases in private sector investment (in areas such as offshore oil and the Vale Inco nickel-processing facility), New Brunswick and Prince Edward Island have experienced declines. In New Brunswick, the announced shelving of the proposed $8-billion Irving oil refinery came as a blow to the hopes of many. In Nova Scotia, the Sable offshore natural gas royalties have peaked and sharp declines are expected, adding further pressure to the government’s future budget deficits.
On the bright side, however, a subsea electricity cable connecting Nova Scotia and Newfoundland to bring Lower Churchill power to the New England market may be on the horizon. And, New Brunswick is considering a second nuclear power plant, pegged as a $4-billion project. It’s against this economic background that pensions in Atlantic Canada must manoeuvre.
Of the four Atlantic provinces, three have pension benefits standards legislation in place: Nova Scotia, New Brunswick and Newfoundland and Labrador. P.E.I. has had a similar statute on its books since 1990, but it has never been proclaimed in force.
Defined benefit pension plans in the Atlantic region are connected principally with the public sector and the near-public sector (municipalities, universities, schools, hospitals) and, to a lesser extent, the private sector—usually with the presence or involvement of one or more unions.
Reform, Reaction and Rebuttal
In 2007, Nova Scotia launched a pension review process, appointing a three-person panel. After extensive consultation, including an interim report seeking comments, the panel’s final report was issued in early 2009—to mixed reviews. While plan sponsors welcomed recommendations for the elimination of partial windups and mandatory grow-in benefits, they also expressed serious concerns about the very different direction the panel was recommending for funding standards and the “passport” system for regulatory jurisdiction.
The proposed funding standard was a curious amalgam of current solvency and going-concern requirements, including early retirement decrements, unlike anything else in place in Canada. Under the proposed passport system, Nova Scotia members of Ontario-registered plans, for example, would be subject to Ontario minimum standards—not Nova Scotia rules. This is the exact opposite of the current practice.
In 2010, the newly elected NDP provincial government issued an additional pension discussion paper seeking further input on the original pension review panel’s positions and recommendations. Submissions were received until June of this year, and any legislation changes that may result are yet to be disclosed.
Neither Newfoundland and Labrador nor New Brunswick has embarked on an independent review process of pension standards legislation. It is expected that they will assess and react when substantial legislative changes are made in other jurisdictions in Canada. New Brunswick has recently appointed a three-member panel to review and consider changes to its pension arrangements for members of the legislature.
At the same time that some provinces are looking at their pension regulatory regimes, a national debate has developed about the state of Canadians’ retirement savings. Options to improve retirement income security under discussion include expansion of the Canada Pension Plan (CPP) by means of increasing covered earnings (by increasing the yearly maximum pensionable earnings) or doubling benefit levels with a concomitant increase in contribution levels. At the finance ministers meeting in P.E.I. in June, attendees expressed support for a modest, mandatory, phased-in and fully funded enhancement to the CPP. While the Atlantic provinces have not weighed in definitively on this, Nova Scotia has released a consultation paper seeking the public’s input on mechanisms for enhancing the retirement income system in Canada. Submissions were due Sept. 17, 2010.
Meanwhile, despite decent year-to-date returns, plans continue to struggle with low interest rates and their impact on solvency liabilities. Funding relief in Atlantic Canada has been modest and slow in coming, with special exceptions confined to the near-public sector—primarily universities and municipalities.
Plan sponsors that have been sitting tight on Dec. 31, 2007 valuations—waiting and hoping for improvements before their next triennial valuation at the end of 2010—are bracing for a big hit. In all likelihood, their solvency positions will have worsened due to asset underperformance and declining interest rates. Based on the Mercer Daily Economic Snapshot, a typical balanced pension fund in Atlantic Canada is looking at an annualized return over the period Jan.1, 2008 through Sept. 30, 2010 of about 1% (before adjusting for the impact of fees and active management). The Mercer Pension Health Index, which stood at 82% at Dec. 31, 2007, is now down to 68%, as of Sept. 30, 2010. A dramatic turnaround for the balance of the year will be needed if the fortunes of plans are to improve.
In Atlantic Canada, the options for funding relief as they currently stand are summarized as follows:
Nova Scotia: New and existing solvency deficiencies may be amortized over 10 years (instead of the usual five years) for the first valuation with an effective date between Dec. 30, 2008 and Jan. 2, 2011, provided that no more than one-third of members or former members object.
Municipal pension plans have the additional alternative of funding to 85% solvent over a five-year period, but funding to 100% solvent resumes after 2016.
Universities can fund solvency deficiencies arising before Jan. 1, 2006, over 15 years—but again, the effect of that relief is diminishing over time.
On Sept.14, 2010, the N.S. government released regulations that provided further solvency relief for municipalities, universities and specified multi-employer pension plans (SMEPPs). The new regulations allow municipalities to fund to 85% solvent over a 10-year period, but with a catch—interest must also be paid each year on the 15% unfunded portion of the solvency obligation. This new interest requirement can negate much of the funding relief the provision might otherwise have provided. Universities can now fund their solvency deficits (arising before Jan. 2, 2011) over a 10-year period. Payments may be deferred for the first year and the deficiency funded over the remaining nine years. Earlier funding relief afforded to SMEPPs has been extended
New Brunswick: The funding relief instituted with a variety of other changes in 2003 is still in place, but its effectiveness declines with each passing year. With Superintendent approval, plan sponsors can amortize their solvency deficiencies over the fixed period to Dec. 31, 2018. When first adopted, this was a 15-year amortization period, but today it represents only an eight-year funding period. By 2013, special relief under this provision will be completely exhausted. There has been no word of any new or extended relief.
For municipalities and universities, a full solvency exemption is available provided that the majority of voting members and former members support the exemption. There are prescribed notice and voting requirements in place.
Newfoundland: Amortization of new and existing solvency deficiencies over 10 years is permitted with member consent or a letter of credit. This applies in respect of valuations with an effective date between Jan. 1, 2007 and Jan. 1, 2009. Member consent is required and is deemed to have been given if no more than one-third of members or former members object.
Plan-specific funding relief measures have been enacted by regulation for Memorial University of Newfoundland and the province-wide municipal pension plan.
P.E.I.: Because there is no pension standards legislation in force, there are no minimum funding requirements for pension plans in P.E.I.
Pure public sector plans are exempt from minimum pension funding standards throughout Atlantic Canada, but that doesn’t mean they’ve had an easy time of it. In Nova Scotia, the historically fully indexed public service plan underwent a transformation that imposed a review process that resets indexing and contribution levels every five years. This applies not just to active members or new retirees but also to all pensioners under the plan. Future indexing for everyone is dependent on the financial position of the plan. Also in Nova Scotia, the provincial teachers’ pension plan adopted contingent indexing for new retirees from 2006 forward. Given the recent funded position of that plan, it seems that attaining the 90% funded ratio threshold necessary for indexing to apply is several years away. We’ve yet to see similar action in other Atlantic provinces, but they, too, face significant financial challenges in their public sector pension arrangements.
The economic and regulatory environment for pension plans continues to be challenging not just in Atlantic Canada but also across the country. Continued low interest rates and poor investment returns have dampened hopes for a rebound in the financial position of their plans. Funding relief, where it has been provided, has been modest, slow to come and accompanied by difficult conditions.
Still, there is optimism on both the economic front and the pension front. In a land rich in natural resources and with a strong post-secondary education network, the potential for success and reward exists—with creativity and determination. Similarly for pensions, meaningful and well-considered pension reforms could strengthen our retirement income system and lead to greater security for Canadians in retirement. With the demographic and financial challenges we face on the east coast, it will be increasingly important for individuals to be self-reliant in terms of their retirement income security. BC
© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the November 2010 edition of BENEFITS CANADA magazine.