The dogs that didn’t bark

Many of the proposals in the package are designed simply to bring the federal pension regime into line with the corresponding rules in the various provincial pension benefits statutes. For example, the notion of immediate vesting of pension benefits, initiated by Quebec in 2001, will now be extended to members of federally-registered plans. Similarly, and somewhat more controversially, the federal legislation will be brought into line with virtually all of the provincial statutes in requiring full funding of any solvency deficit in the event of a defined benefit plan termination.

As both of these changes will have cost implications for plan sponsors, it can be anticipated that they will be phased only slowly into force. However, the Department of Finance’s news release does not specify the intended effective dates for these or most of the other contemplated reforms.

There are also some more innovative proposals. One is the concept of a “workout scheme for distressed pension plans”, which will allow plan stakeholders to negotiate short funding moratoriums and other deviations from the ordinary contribution rules. This proposal is clearly modeled on the special funding regulation enacted by Ottawa for the Air Canada pension plans in July 2009, which includes a 21-month moratorium on deficit reduction contributions and then three years of fixed employer contributions, irrespective of the evolution in the funded position of the plans during that period.

Another potentially innovative reform has to do with the elaboration of detailed rules for so-called “negotiated contribution defined benefit plans”. Much of the impetus for this reform can likely be traced back to a controversy surrounding a Saskatchewan Wheat Pool negotiated cost pension plan several years ago. It is possible, though, that these rules could constitute the beginnings of a code for regulating the much-vaunted “target benefit” plans, which have been advanced by many over the past year as a way to bridge the great defined benefit/defined contribution divide which has bedeviled the pension sector for the last decade or more.

Ultimately, though, one is drawn to the elements which could have been, but did not, make it into the reform package. A case in point is the federal pension fund investment rules, which have also been adopted by reference by most of the provinces and therefore now apply to the vast majority of Canadian registered pension plans.

The regulations in this area were enacted back in the mid-1980s and have barely been touched since then, a period during which the size and investment sophistication of many Canadian pension plans and those plans’ role in the capital markets have grown exponentially. Yet the proposed changes to such rules are very minor. In particular, Finance has not signaled any intent to ease or repeal the rule restricting pension plans from acquiring more than 30 percent of the voting shares of investee corporations in most cases, not even for the largest and most adept public sector plans. This rule has proven increasingly problematic as the years pass. Hopefully, Finance will be open to representations for a more fundamental revision of the investment regulations before this package is enacted into law.

In the same vein, the proposals do little more than tweak the current solvency funding rules. That is to say, it is contemplated that solvency funding will henceforth be determined by reference to a plan’s average solvency position over a 3-year period as opposed to the current rule which references only the most recent annual solvency snapshot. This measure should reduce the year-to-year volatility of employer funding levels. But there is no mention of any fundamental change to the actuarial basis (e.g. the reference discount rate) on which solvency liabilities are themselves computed or to the 5-year amortization period applicable to most solvency deficits. Here again, it is to be hoped that the government will be open to a robust consultation process.

There are a number of possible explanations for the failure of these particular dogs, or others, to bark. One is that the news release may simply be incomplete. Certainly the release shows signs of having been issued before it was entirely ready, a function perhaps of the pressure which the government might have felt to put it out before any of the opposition parties could seize the initiative on pension issues.

But more fundamentally, there may be a perception in Ottawa that pensions are a zero-sum game—what is seen as a bold initiative by plan sponsors can be perceived as a betrayal by plan members, and vice versa. Better then, to make small, incremental changes than to risk alienating one or the other of these two critical constituencies. And so Canada’s employer-sponsored pension system continues to muddle along.