Ontario reform plan falls short

But Perkin also pointed out that “additional work” was needed to make the proposals clearer. The ACPM released a “Five Point Plan” in June that called on the government to do the following:

• remove barriers to group coverage;
• ensure defined benefit (DB) plans continue as viable options for coverage;
• enable more innovations;
• promote simplicity in administration; and
• increase incentives to save.

This plan, he said, would “encourage new business models and new approaches that will increase the opportunities for Canadians from all walks of life to participate in retirement savings plans.”

The ACPM has advocated for the need for a better legislative environment to maintain current DB plans and to encourage the formation of new DB plans, Perkin said.

But the current proposals achieve only the first goal, according to Fred Vettese, chief actuary at Morneau Sobeco. There is little in the proposals to encourage the private sector to create new DB plans.

“When the Ontario Expert Commission, headed up by Harry Arthurs, was set up, the feeling was that the major purpose behind this was to reignite the system of employer-sponsored pension plans — especially DB plans,” Vettese said.

“[Instead], they focused on even stricter funding rules, focusing on the security of the few remaining people who are in DB plans, as opposed to finding ways to encourage employers to set up new plans. Nothing has been done to encourage employers to set up new plans.”

In fact, the changes to DB funding rules, restrictions on contribution holidays and the increase in pension benefits guarantee fund (PBGF) assessments will increase the burden on the few remaining DB plan sponsors, he says.

The government should have addressed the asymmetrical risks associated with plan surpluses, where regulations mandate that surpluses belong to the pension plan, but deficits are solely the responsibility of the sponsor.

“Employers have no incentive to fund plans properly — they’re going to try to minimize funding to the plans to the [greatest] extent possible,” Vettese says.

Also problematic are grow-in rules, which provide early retirement benefits to DB plan members who are part of a pension plan windup.

“These grow-in rules were brought in 30 years ago, when going-concern costs were higher than windup costs,” he explains. “There is no other jurisdiction in Canada, and probably in the world, that has grow-in rights.”

Not only do the latest proposals leave the grow-in rights in place, they also strengthen the practice, because grow-in now applies to terminated employees.

“[The reforms] are great if you’re one of the few remaining people in a private pension plan who wants more security for your benefit, but that doesn’t affect a lot of people,” says Vettese. “We’re looking at maybe 20% of the private sector being covered by a DB plan.”

While there are a great many more people covered by DB plans in the public sector, the funding of their plans has never been in question, as the employer can always cover any shortfall through taxation.

Another problem is that the government’s pledge to add $500 million to the PBGF would reinforce an imbalance in the retirement funding universe.

While the PBGF provides a certain level of security to DB plan members, there is nothing in place to support DC plan members who have sustained losses in their pension accounts.

“Nothing is said as to why certain Ontarians should be getting greater security of benefits than others,” he says. “They shouldn’t be providing guarantees in the first place. There’s no other province that has a pension benefits guarantee fund.”