Pension Expert Reports Released: A Comparative Review

Written By Susan G. Seller; Sean L. Maxwell

Pension Expert Reports Released: A Comparative Review Pension

In recent weeks, two much-anticipated expert reports on the state of pension legislation have been released. The November 20, 2008, release of the report of the Ontario Expert Commission on Pensions, entitled A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules, followed a week after the Joint Expert Panel on Pension Standards submitted its report to the Alberta and B.C. governments. While there are many similarities between the reports in terms of their conclusions and recommendations, more surprising to some were the critical differences, including the different approaches taken by the respective experts.

This update summarizes the key aspects of each report that will be of interest to plan sponsors and considers the likely impact on pension reform initiatives underway in these provinces.

Ontario Expert Commission on Pensions

Ontario's Expert Commission on Pensions was established in November 2006 with a mandate to consider the legislative framework applicable to defined benefit (DB) pension plans focusing on the rules relating to funding and the use of surplus, as well as the general security and sustainability of DB pension plans. The resulting report, which contains close to 150 recommendations, is a thorough examination of the DB pension environment in Ontario and the issues affecting Ontario pension plans. However, unlike the report of the Joint Expert Panel (which had a much broader mandate), the Ontario Expert Commission report's failure to consider issues relating to defined contribution (DC) plans renders it somewhat incomplete as a framework for wholesale legislative reform.

New Regulatory Regime

Much of the Expert Commission report focuses on the establishment of a new regulatory regime, including the appointment of a stand-alone Ontario pension regulator (and pension tribunal) with expanded information gathering and investigative powers. In some respects, this is a return to the earlier approach, under which the Pension Commission of Ontario was responsible for the regulation of pension plans (without the additional responsibility for mortgages, insurance and certain other sectors given to the Financial Services Commission of Ontario a decade ago). The report also recommends the introduction of a Pension Champion, who would be tasked with promoting workplace pension coverage and serve in a policy advisory capacity to the Minister of Finance.

Whither Funding Relief?

Somewhat disappointingly, the Expert Commission did not endorse views expressed by many plan sponsors that diminishing DB pension coverage is directly related to the increasing costs associated with such plans, the regulatory burden imposed by legislation and the uncertainty created by various court decisions that restrict the ability of plan sponsors to merge plans and deal with pension plan surplus. While the Expert Commission received many submissions encouraging relief from solvency funding rules, the report did not recommend such measures. Instead, in a somewhat surprising move, the report recommends stricter solvency funding rules by requiring plan sponsors to fund a five percent security margin above full funding. While the amortization period for plans with funding ratios of 95 percent or more would be extended from five years to eight years, the vast majority of plans with solvency deficiencies would continue to have only five years to fund deficiencies through special payments (and would also be required to fund the five percent security margin).

Given the recent market turbulence, this recommendation appears ill-timed as well as unsympathetic to plan sponsor concerns. Recent announcements from the Ontario government regarding temporary solvency funding relief (among other things, temporarily extending new solvency amortization periods from five to 10 years provided certain conditions are met) would seem to indicate that this particular recommendation will not be adopted, at least in the near term.

Revised Surplus Regime

The report recommends a revised surplus regime, although apart from doing away with the requirement to distribute surplus on a partial windup, it is not clear how effective the proposed changes will prove in practice. The report recommends that surplus be distributed in accordance with the terms of the plan documents in cases where entitlement to surplus is clear, but in cases where entitlement is unclear, the sponsor may proceed by way of a surplus sharing agreement with members (or their legal representative). This approach would not require plan sponsors to demonstrate entitlement to surplus on windup even where a negotiated agreement is reached with members, as is currently the case. If the employer and plan members (or their representative) are unable to agree, the issue of entitlement would be resolved by a method agreed to by the parties, or if they cannot agree, by the proposed Pension Tribunal of Ontario.

On the issue of contribution holidays, the report recommends that plan sponsors should be allowed to take a contribution holiday if the plan is funded at 105 percent or more, but must resume contributions immediately if the sponsor knows or ought reasonably to have known that plan funding has fallen below 95 percent. Moreover, plan sponsors who take an unauthorized contribution holiday may be ordered to repay amounts improperly withheld or to pay an administrative fine of up to $1 million.

Partial Wind-ups Partially Eliminated

The report does not recommend the complete elimination of the partial wind-up concept, although many of its important features are diluted by (i) providing for immediate vesting of all pension benefits, (ii) abolishing the requirement to distribute surplus on partial wind-up, and (iii) granting "grow-in" rights to any involuntarily terminated employee. As the report does not provide any guidance on what constitutes an involuntary termination, if this recommendation is implemented, we expect that this will be a source of considerable dispute and litigation. Finally, the report recommends that partial wind-ups be restricted to circumstances where 40 percent or more of active employees are terminated within a two-year period.

The Return of Guaranteed Indexing

Also of note are recommendations that the Ontario government proclaim into law long-dormant provisions providing for mandatory pension indexing during periods of "inflation emergencies". Though the report does not define inflation emergencies, such a requirement would seem to add additional uncertainty by leaving open the prospect of mandatory indexing, and, if enacted, further exacerbate the cost of a DB pension plan.

Other Highlights

The report also made a series of other recommendations which may be of interest to plan sponsors:

• Expedited approval of plan splits and mergers where there is agreement with members or a union, provided that they do not result in a reduction of funding levels below 105 percent;
   
• Enactment of provisions permitting cross-subsidization of DC benefits with DB surplus following a plan conversion provided certain conditions are met;
   
• Elimination of the 30 percent rule for certain jointly governed plans with sufficient investment expertise;
   
• Permitting the use of letters of credit, and possibly asset pledges, to provide security for unpaid contributions;
   
• A requirement that each plan have a pension advisory committee with representation from both members and retirees, unless the plan is jointly governed;
   
• Creation of an Ontario Pension Agency to accept, administer and distribute funds left stranded when a plan is wound up or when members cannot be found;
   
• An increase in the level of monthly benefits guaranteed by the Pension Benefits Guarantee Fund from $1,000 to $2,500; and
   
• A requirement to file funding and governance policies with the regulator, as well as increased information for members and retired members.

The Expert Commission report recommends that the Ontario government determine as quickly as possible which recommendations that it wishes to implement and which should be done on a priority basis. The Ontario government has asked for "focused feedback" on the report by February 27, 2009.

Joint Expert Panel Report

In contrast to the Ontario Expert Commission, which was given a restrictive mandate to consider only DB issues, the Joint Expert Panel was tasked with considering a wide array of DB and DC concerns. Additionally, while given fewer resources than the Expert Commission (which had a small permanent staff and was able to commission a number of in-depth academic studies), the Joint Expert Panel was asked to conduct its review over a shorter time-period and was co-chaired by two lawyers active in the pension field. Perhaps not coincidentally, therefore, the Joint Expert Panel report is more comprehensive in scope and more directly proposes the overhaul of pension legislation in Alberta and B.C.

Highlights

In keeping with the Joint Expert Panel report's pragmatic and focused approach, some of the more significant recommendations of interest to plan sponsors are:

• Complete harmonization of pension legislation through the adoption of identical statutes and the appointment of a joint pension regulator, pension tribunal and policy advisory council to promote continued harmonization on an ongoing basis; 
   
• Establishment of distinct funding rules tailored to defined benefit and target benefit plans (such as multi-employer plans which promise a defined benefit but which operate in practice as DC plans);
   
• Moving from a primarily rules-based to a principles-based legal regime, with the goal of increasing pension coverage through more flexible legislation accommodating of new plan designs;
   
• Incorporating the Guidelines on Capital Accumulation Plan Governance (the CAP Guidelines) into provincial pension law; 
   
• Creating an Alberta/British Columbia Pension Plan that would operate at arm's-length from the government and allow for voluntary DC participation by all Alberta and British Columbia employers and employees (including the self-employed), giving access to professional investment management and economies of scale;
   
• Requiring solvency valuations on an annual basis, unless the solvency ratio is or exceeds 110 percent, in which case the next valuation would not be required for three years; 
   
• Permitting the cross-subsidization of DC benefits with DB surplus, provided that the DB and DC segments comprise part of the same trust; 
   
• Allowing sponsors to make contributions in excess of the amount necessary to fund going-concern liabilities into a separate pension security fund, which could be accessed if necessary to fund benefits but would not be subject to the rules governing the plan fund and could be withdrawn in certain circumstances; 
   
• Mandating that surplus withdrawals or contribution holidays be spread over five-year periods, with annual valuation updates to confirm that plan continues to be in surplus; 
   
• Repealing quantitative limits on investments and replacing existing rules with a "prudent person" standard; and
   
• Establishing a "pension judgement rule" to provide fiduciaries with a statutory defence against breach of statutory fiduciary duty claims where decisions can be demonstrated to have been made in compliance with the plan's governance guidelines, in good faith, on an informed basis, in the interests of beneficiaries and in the absence of conflicts of interest. Individuals with statutory fiduciary responsibilities would be required to complete training in fiduciary obligation at a post-secondary institution.

The Way Forward

All three provinces are currently seeking input from pension stakeholders on the respective reports (Alberta and British Columbia are receiving comments until March 2, 2009). Reform initiatives in each province will presumably follow at some point during 2009, although the process may be delayed in Alberta and British Columbia should both provincial governments agree to coordinate their reform approaches in the manner suggested in the Joint Expert Panel report.

However, the Joint Expert Panel report may prove easier to implement on an expedited basis given its focus on both DB and DC issues and the more direct blueprint for legislative reform that it provides. The Expert Commission report, in contrast, is in many respects a policy review and so may require extensive examination before its recommendations can be converted into specific reform initiatives.

Whether provincial reform initiatives will closely follow the two reports also remains to be seen. While the B.C. government has already announced its intention to establish a province-wide optional DC plan similar to the proposal contained in the Joint Expert Panel report, the Ontario government, in announcing temporary solvency funding relief in the wake of the precipitous decline in equity markets, appears to be distancing itself from one of the key recommendations of the Expert Commission (at least in the short term). Given the infrequency of wholesale legislative reform, the Ontario government may also conclude that, notwithstanding the limited focus of the Expert Commission, DC plan issues will also need to be addressed as part of its pension reform initiative.