Why National And Multi-Jurisdictional Pension Plans Are An Endangered Species
For years, all pension plan stakeholders have been grappling with funding concerns. The challenge is so daunting that many private sector employers have decided to abandon their defined benefit pension plans. The significant gains enjoyed by most plans over 2013 will help alleviate some funding pressure, but challenges remain. Even if one could magically dismiss all remaining unfunded pension obligations with the wave of a wand, the cost of saving for retirement has grown beyond most plan sponsors’ budgetary constraints, increasing calls for some type of expanded public system to fill in the gaps.
Recognizing that inaction would result in further erosion of private sector pensions, the federal regulator and each of the provincial regulators have all been searching for solutions. Most of them have expended considerable time and resources to address the concerns of their constituents.
The Achilles heel of all their efforts is the inability of the separate regulatory jurisdictions and their political masters to form or enact a single co-ordinated strategy or solution for the entire country. Looking across the vast Canadian landscape, we now have a myriad of jurisdiction-specific plan types and funding models, each well-intentioned approach developed to address a specific need at the expense of national harmonization.
The lack of harmonization has burdened national and multi-jurisdictional plans with higher costs for operations, administration, compliance, and/or communication. To date, despite these higher costs, national and multi-jurisdictional plans have generally persevered and maintained their original geographic coverages. The notable exceptions are multi-jurisdictional multi-employer plans that cover any members who work in Québec because of that province’s prohibition against any type of accrued benefit reduction. However, the pending implementation of new harmonized Alberta and British Columbia legislation1 will expose national and other multi-jurisdictional plans registered within those two provinces to new challenges that may prove to be insurmountable.
New Era Legislation Is Incompatible With Current Models
More than five years ago, Alberta and British Columbia embarked on an ambitious project to introduce pension legislation that would address the legal and regulatory issues motivating many plan sponsors to abandon their pension arrangements. They also undertook to introduce completely harmonized legislation between the two jurisdictions.
The expected outcomes of this unprecedented co-operation and harmonization range from hugely successful to impending doom, depending on plan characteristics and/or the nature of the plan sponsorship. The big winners will be single-employer pension plans in the private sector whose membership does not extend beyond the borders of Alberta and British Columbia. Those plans will gain access to solvency reserve accounts.2 They may also gain access to target benefit provisions.3
Public sector plans will be brought under the same legislative umbrella as all private sector plans. That change will expose public sector plans to both positive and negative outcomes.
For most multi-employer pension plans (MEPPs), the new legislation will allow for immediate conversions to the new target benefit provision rules and a decrease in the level of commuted values paid.4 Moreover, they will be granted permanent relief from solvency funding requirements, albeit with more conservative going-concern funding requirements. One unintended consequence of the new rules is that, for some MEPPs, they could act as a disincentive for increased contribution levels which could result in an intergenerational transfer of wealth from those currently employed to those already on pension. The plans with the most to lose under the harmonized laws are the national and other multi-jurisdictional MEPPs registered in Alberta or British Columbia that have members outside of those provinces, as discussed below.
Will National MEPPs Sink Or Swim?
Based upon applicable legislation5 expected to be in place at the time Alberta and British Columbia enact their target benefit legislation, the provinces’ target benefit provisions will be restricted to benefits earned in Alberta or British Columbia and will be prohibited from being applied to benefits earned in all other employment jurisdictions.6 As a result, national pension plans registered in Alberta or British Columbia that also have members outside of those provinces will face three unappealing choices:
- Continue to Treat All Members the Same. Under this status quo approach, all members would remain subject to the defined benefit regulatory requirements. More importantly, solvency-funding requirements would be reintroduced once the temporary solvency funding moratorium in place for MEPPs under the current regulatory framework since 2006 ceases to exist. While this approach treats everyone equally, it also places them all in the same boat, but is it one that is sinking?
- Create Two Classes of Members within the Same Pension Plan. The Alberta and British Columbia members would form one class of members (the target benefit class). All other members would form a separate class (the defined benefit class). Potentially, plan assets would be split notionally between the two classes and separate accounting and administration would apply to each class going forward. For the target benefit class, significantly smaller commuted value payments will be paid any time portability is exercised. It is unclear how trustees will be able to discharge their duties to act evenhandedly when the commuted value payouts for otherwise identical members may vary considerably based on province of employment. The introduction of classes will also present substantial communication challenges in a predominantly unionized environment void of class distinctions. With two such diverse classes and the need to manage two plans notionally within a single plan structure, it is difficult to imagine how any national pension plan could continue to operate as a national plan.
- Split the Pension Plan Into Two Separate Plans. Similar to creating two separate provisions within the same pension plans, a single MEPP could be split into a target benefit plan registered in Alberta or British Columbia, and a traditional multi-employer defined benefit plan registered in the province outside of Alberta and British Columbia having the most active employees. This outcome would not only mean the end of the national plan, but a loss of economies of scale, resulting in higher operational costs.
Unless a legislative solution is enacted, one of the three scenarios above will take hold of national and other multi-jurisdictional pension plans registered in Alberta and British Columbia. Although the number of these plans is relatively small, they cover a large number of workers. Consequently, the impact would be felt by thousands of individuals who will see their plans broken apart either notionally or for real.
Do National Plans Have a Future?
With Québec having already isolated itself from the rest of Canada and with the creation of a separate class for Alberta and British Columbia members, Ontario would represent the only jurisdiction in Canada where we might expect to find a MEPP registered that resembles anything close to a national pension plan.
At the moment, the outlook for national and multi-jurisdictional plans is not encouraging. While the individual jurisdictions are all striving to protect and enhance pension coverage in their jurisdictions, with some significant improvements being achieved individually,7 the lack of political co-ordination across all the jurisdictions will most certainly drive national pension plans into extinction. Where the vision was once to achieve a co-ordinated, simplified, and harmonized pension regulatory system in Canada, political and economic reality have led us far off course.
Phil Rivard (FSA FCIA) is a vice-president and client relationship manager for Segal Consulting in Edmonton, AB (firstname.lastname@example.org).
1. The legislation is expected to be enacted in the summer of 2014.
2. Solvency reserve accounts are sub-accounts, within a trust fund structure, specifically created to hold solvency-funding contributions. Should solvency-funding experience in the future be positive, the contributing employers will have clear entitlement to any excess solvency-funding contribution and rules on how those funds can be accessed.
3. A target benefit provision aims to provide a defined benefit, but with fixed predictable contributions. In contrast to a defined benefit provision, when the provision’s actual experience deviates from the assumptions used in the determination of the target benefit, rather than increasing or decreasing the funding contributions, the target benefit is adjusted up or down instead.
4. Current commuted value calculations are premised on the assumption that future benefits are 100 per cent guaranteed, which is clearly inconsistent with the nature of a target benefit provision. Where a target benefit provision is supported by the assumption of investment risk, the commuted values will appropriately reflect this risk.
5. Applicable legislation includes the federal pension legislation, all the provincial pension acts and regulations, and the Agreement Respecting Multi-jurisdictional Pension Plans developed by the Canadian Association of Supervisory Authorities (CAPSA).
6. Saskatchewan may prove to be the exception as their legislation appears to permit certain target benefit approaches.
7. The co-ordinated approach taken by Alberta and British Columbia is an exception and might possibly represent a model for other jurisdictions to follow, but unless that occurs, the gains will be significantly tempered.