Federal Finance Minister Jim Flaherty unveiled a set of reforms on Tuesday, Oct.27 aimed at shoring up some of the weaknesses in Canada’s pension regime.
Arguably the most significant proposal is the raising of the threshold at which plan sponsors can over-fund their pension plans, from 10% to 25% of the fund’s assets. Some plan sponsors and pension consultants have indicated that the ability to over-fund their plans would have helped to mitigate the damage to asset valuations brought on by the global financial crisis.
Under the proposed legislation, employers will be required to fully fund pension benefits when a plan is terminated. At present, employers must fund only 80% of benefits. The bill will also prohibit employers from taking a contribution holiday unless they provide a 5% funding cushion and will change the solvency funding methodology to make it less volatile by basing the funding requirements on a three-year average.
Flaherty explained that the reforms are meant to enhance protections for plan members, make it easier for participants to negotiate changes to their pension arrangements, improve the framework for defined contribution plans and for negotiated contribution plans, and modernize the rules for investments made by pension funds.
“These reforms will provide enhanced benefit security for workers and retirees while allowing pension plan sponsors to better manage their funding obligations as part of their overall business operations,” said Flaherty in a statement.
The proposed changes come after almost one year of consultations with stakeholders across the country. A committee led by Conservative MP Ted Menzies sought feedback on issues such as the pension surplus threshold and whether alternative designs—besides defined contribution and defined benefit—should be allowed.
According to the ministry, the changes will mostly affect federally regulated pension plans, which make up only 7% of all pension plans outstanding and involve sectors such as telecommunications, airlines and railways.
A joint pension system study conducted by the federal and provincial governments is expected to be released in December.
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