While a complete overhaul of the retirement funding system is still a long way off, Bill C-9 Amendments to the Income Tax Act and related acts and regulations is winding its way through Parliament.
The bill is largely a budget implementation measure, but it includes several amendments to the Pension Benefit Standards Act. In this regard, the goal of the bill is to ease the burden that defined benefit (DB) plans place on federally regulated sponsors.
Under C-9, new minimum standards would be brought in, including immediate vesting and lock-in provisions after two years of membership.
In the past, if a plan sponsor topped up the fund, but later discovered that the payment had put the plan into a surplus, they could not reclaim the excess amount. Under the proposed new rules, these excess amounts would not be treated as “surplus” and could therefore be recaptured by the employer.
The bill includes provisions for distressed plan work-outs, rather than the ad hoc special regulations used in the past to grant exemptions to individual plans.
In the past, these one-off regulations allowed sponsors to defer special payments and employ certain treatment of liabilities which might not otherwise be permissible.
If adopted, the new work-out scheme would require the employer and representatives of the employees to negotiate an agreement that includes a new funding schedule for future payments. The negotiated plan would require ministerial approval, which requires no more than one-third opposition from members, as well as from beneficiaries.
“The distressed plan work-out scheme will allow for an efficient and legally sound process in providing for what amount to special arrangements for employers whose pension plans are imposing significant financial stress on them,” says Ross Gascho, partner in Faskin Martineau’s pension and benefits law group.
Surplus
There are even provisions for that rarest breed of DB plan: those with a surplus.
“For those employers whose plan still have surplus—and there still are plans that have surplus—the increase in the surplus threshold from 10% of liabilities to 25% of liabilities is significant,” says Gascho. “The effect of that is they will be allowed to contribute to those plans again. Currently, if you hit that 110% limit, the employer is precluded from contributing to the plan again.”
Gascho also welcomes what appears to be permanent inclusion of letters of credit as a means to secure some liabilities. Previously, these had only been allowed on a temporary basis and under very restricted circumstances.
“I think we’ll continue to have very restricted circumstances in terms of when letters of credit can be used, but by embedding their permissibility in the act, the government will be allowing employers who need them to be allowed to use them, instead of waiting for some special regulation to permit them to use them.”
The bill would also eliminate partial wind-ups, except for those ordered by the regulator.
Increased regulation
But the bill also expands the powers of the regulator that oversees federally regulated pension plans. Gascho points out that many plan sponsors may be surprised by just how much power OSFI has.
“The extent of the powers that OSFI has over the plan is much more significant than most people realize,” he says. “In practice, we haven’t seen OSFI exercise those powers on a broad basis.”
In Ontario, for example, pension regulation is set within the context of labour relations.
“With OSFI, you can see that they’re coming at this as a financial regulator,” Gascho says. “What they’re concerned about is the ability of the plan to meet its obligations. It’s as simple as that.”
Federally-regulated sponsors could get a taste of OSFI’s power if funding status declined precipitously. In such an event, OSFI could order new valuations of the plan
“It would be another test as to what does OSFI consider its role to be,” he says. “Their risk assessment system might say that this is a plan whose funded ratio has dropped significantly and so in turn they want to see a fresh schedule of contributions.
“In 2008 they tried to use moral suasion to force new valuations. They haven’t swooped in previously on a wholesale basis, but certainly the power exists to do it.”
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