Many Canadian pension plan sponsors will recall the late 80s and early 90s as a time of significant change. Over a span of about six years, the federal and most provincial governments introduced significant changes to their respective pension laws and regulations. While there was certainly some fine-tuning to the laws and regulations over the 20 or so years since the major reforms, there has not been a concerted period of pension change in Canada. Until now, that is.
The reforms provided greater protection of the benefits earned by plan members, generally through stronger vesting rules, and introduced the concept of solvency funding as a second measure for determining minimum contribution requirements.
In Ontario, the reforms also included the introduction of “grow-in” benefits for members included in a full or partial windup whose employment or plan membership was terminated involuntarily. While each plan sponsor was affected by the reforms differently, compliance was most difficult for businesses that operated across several or all jurisdictions.
In early October, the Quebec government announced, through Bill 30, its latest reforms for Quebec-registered pension plans. This was followed, on Oct. 27, 2009, by an announcement by the federal government setting out its intentions to implement reforms for plans under its jurisdiction. The next day, Ontario announced a timeline for its provincial pension reform process. In the meantime, British Columbia and Alberta have been jointly examining pension reforms, so more change in these jurisdictions is expected on the horizon. Since the vast majority of Canadian defined benefit (DB) pension plans are registered in these five jurisdictions, the impact of the next wave of pension reform will be felt by most, if not all, pension plan stakeholders.
This article focuses on the proposed federal changes pertaining to traditional DB plans. Unlike the last round of major pension reform, where most changes were designed to enhance or better secure members’ benefits, the federal changes provide a mixture of benefit protections for plan members and financial relief for plan sponsors.
Protection of member benefits
There is only one change which directly impacts member benefits—plan members will now be fully vested upon plan entry—ensuring that even short-term members retain their pension entitlement upon termination. Since the current minimum standard is two years, this will not be a costly change for plan sponsors. Plans may still require a member to satisfy a waiting period before entry, which should help reduce administration costs for short-term employees.
Several changes will result in greater financial security of benefits for members. First, plan improvements will not be permitted if, following the improvement, the plan’s solvency ratio would be less than 85%. If the plan sponsor funds the entire improvement immediately (or, presumably, enough of the improvement such that the solvency ratio would not drop below 85%), the amendment would still be permitted.
This new restriction will undoubtedly cause significant challenges for sponsors where the plan has been regularly updated to provide pensioner increases, flat dollar or career average plan updates, or other improvements resulting from the collective bargaining process. If the plan is already below the 85% threshold (as many are), plan improvements cannot go forward unless the sponsor has the cash to immediately fund the full cost of the improvement. For some sponsors, this may actually work in their favour as they can reject pressure/demands for benefit improvements for compliance reasons.
Once the reforms are implemented, plan sponsors will be required to file valuations annually and to remit minimum contributions monthly. For plans in a deficit position—which already must file valuations annually—this only changes the timing of contributions. For plans in surplus, this will result in a more-frequent confirmation of funded status to support employer contribution holidays.