The case for a principles-based regulatory pension system for single-employer pension plans governed by both plan members and plan sponsors.

The search for a better way to regulate pension plans is underway in Canada. Alberta, British Columbia, Nova Scotia and Ontario have all appointed expert commissions to determine if the way defined benefit pension plans are regulated can be improved.

But what way is the best? Is it a system that prescribes rules and imposes sanctions if the rules are not followed? Is it one that emphasizes that principles and best practices should guide plan administrators? Or is it a combination of the two?

Our current system of pension regulation is rules-based. One concern with this type of system is its rigidity—it does not involve members of single- employer pension plans (SEPPs) in the operation of their pension plans. In a SEPP, the plan administrator—typically the employer—has control over all aspects of the plan’s operations. Investment, funding and benefit levels (other than those that are collectively bargained) are left in the employer’s hands.

Under this current system, the employer typically assumes responsibility if there is a funding deficiency in the plan. Employees assume that they will receive what has been promised to them under the terms of the plan. Members are involved only if there is a crisis in the plan. In an insolvency, for example, in order to survive, employers will seek the assistance of members in approaching regulatory authorities to relax funding rules for the pension plan. The task of dealing with this issue becomes difficult in a regulatory system that does not allow for regulators to approve compromises reached by plan sponsors and plan members. The situation is further complicated as members do not become aware of the unfunded position of the pension plan until the plan sponsor approaches them for help.

A principles-based system of regulation could allow members to work through their problems and then approach regulatory authorities for approval. Allowing the parties to the pension promise to sort out their own issues instead of relying on a regulatory authority is a laudable policy goal. However, this type of regulatory change is not enough because it falls short of meaningfully involving members of a SEPP in the operation of the pension plan, except in emergency situations.

In addition to moving to a principles-based regulatory system, SEPPs should be governed jointly by plan members and plan sponsors. But sponsors of SEPPs will not welcome this solution because they will be reluctant to give up control while simultaneously retaining responsibility for the plan.

To achieve jointly governed SEPPs, the powers within the regulatory system should make an effort to entice employers into accepting this outcome. Jointly governed SEPPs should be subject to a lesser regulatory burden. Among other things, these SEPPs could be subject to the same funding rules as multi-employer pension plans (MEPPs). This would allow members and sponsors to jointly work out solutions to a pension plan’s funding problems.

In Alberta and Ontario, MEPPs have also been granted funding relief. Under my proposed system, jointly governed SEPPs would be eligible for funding relief as well.

Joint governance may also yield other benefits. Typically, large public sector plans are jointly governed. They also tend to be well run and well funded, suggesting a connection between joint governance and the success of these plans.

Pension plans are delicate institutions founded on the employment relationship. The parties to the pension promise are in the strongest position to resolve the issues that arise in pension plans. Consequently, a regulatory system that promotes jointly governed pension plans has the best chance of meeting the needs of both plan members and plan sponsors.

Hugh O’Reilly heads the pension and benefits practice group at Cavalluzzo Hayes Shilton McIntyre & Cornish in Toronto.

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the June 2008 edition of BENEFITS CANADA magazine.