A new DB pension plan helps NHL players stickhandle major disparities in retirement income between its U.S. and Canadian teams
Find the remote, grab a beer and get comfortable: the NHL season has started. While fans are glued to their screens, the NHL and the union representing the players—the NHL Players’ Association (NHLPA)— will keep crafting the long-term course of the players’ new DB pension plan. The arrangement helps to secure the futures of both Canadian and U.S. players—and eliminates major discrepancies in retirement savings between them.
“We wanted to make sure that we were prepared for life after hockey,” says Colin Greening, left wing for the Ottawa Senators and a pension trustee with the NHLPA. The new pension plan took effect early last year as part of the collective bargaining agreement following months of lockout.
Greening says the players made the DB plan a priority during negotiations because, despite their young ages, they understood its value. “During the negotiation process, we had guys who were 18, 19 years old, who were looking at the long-term advantages of a DB plan,” he explains. “It’s not a common topic to talk about when you are 18 or 19.”
The NHL had a DB arrangement years ago but switched to a DC plan in 1986 as part of a collective bargaining agreement. The DC plan, administered by Sun Life Financial, is now frozen and all new entrants enrol in the DB plan.
In exchange for the new DB plan, the players agreed to a smaller share of the league’s revenue—50%, down from 57% under the previous agreement, explains Jessica Berman, vice-president and deputy general counsel for the NHL.
“Money that would have gone to salaries went to pensions instead,” says Alex Dagg, the NHLPA’s director of operations. The reason, she explains, is that most NHL players have short careers, so retirement planning is key.
Career spans vary widely—anywhere from one to 20 years, Greening explains. “But if you can get five, 10, 15 years playing professional hockey, that’s fantastic,” he adds.
Power Play
The new DB pension plan is qualified in the U.S., so Canadian players are subject to U.S. pension rules. Having a U.S. plan makes sense, since 23 of the 30 NHL teams are based there, says David Vincent, a partner at Canadian Benefits Law in Toronto. It also makes sense because Canadian laws impose greater restrictions on the amount people can save for retirement through a DB plan— a reality particularly ill-suited for short NHL careers, he adds.
Canadian DB pension rules allow people to accrue a pension worth no more than 2% of their annual income, explains Mitch Frazer, a partner at Torys LLP in Toronto. “So if you wanted to get a pension worth 70% of your pre- retirement income, it would take you 35 years of playing in the NHL—which, obviously, is not possible,” he says.
The 2% limit exists because a DB pension cannot exceed 70% of pre- retirement earnings, says Vincent. The 70% comes from multiplying 2% times 35 (the maximum number of years of pensionable service that a Canadian can accumulate). Someone who works more than 35 years can’t count the extra years for calculating pension benefits, he adds.
U.S. DB plan rules use a different formula for calculating the maximum benefit. But, generally, American limits are higher, says John McGowan Jr., a partner at Baker & Hostetler LLP in Cleveland, Ohio. Having an American DB plan for all NHL players means Canadian athletes can benefit from those higher limits. “This new DB plan helps to create parity across the league,” Greening explains.
Also, Greening adds, the new pension helps to eliminate the problems that arise when athletes are traded within the NHL. A player can start in Canada, thinking he will retire with a certain amount, but then he gets transferred to the U.S., or vice versa. In the past, such cross-border moves would change players’ pension calculations, explains Greening.
“If you are thinking that you’re going to retire with a certain amount of money and then you’re traded to a new place where the plan terms change, that can be frustrating for players,” he explains.
But how is it legally possible for Canadian players—who pay Canadian taxes—to participate in a U.S. pension plan subject to U.S. tax and pension laws?
In order for the Canadians to receive the benefits promised by the U.S. plan, they need to have a special Canadian pension arrangement—a retirement compensation arrangement (RCA), says Dagg.
The RCA is not a registered pension arrangement. It’s a vehicle high-income earners use to accumulate a pension larger than what the Canadian government allows in registered plans. Having an RCA means that the Canadian players have to pay a significant additional tax to the Canadian government, adds Dagg.
“It’s almost like a high-end savings account,” Frazer explains. “The RCA is designed to mirror for employees of Canadian teams the benefits they would receive if they were members of U.S. teams, which would bring them above the pension limits in Canada.”
Matching the Lines
While the new DB plan gives players on both sides of the border the same pension benefits, differences remain regarding the amounts American and Canadian players can put aside in voluntary retirement savings vehicles, such as 401(k)s in the U.S. and RRSPs in Canada.
As with DB pension plans, U.S. limits for these vehicles are greater than Canada’s. For example, the 2014 U.S. limit for 401(k)s is US$17,500 for pre-tax contributions and $34,500 for post-tax contributions. In Canada, the 2014 annual limit for an RRSP is C$24,270.
Why does Canada impose greater restrictions on sheltering tax through voluntary retirement savings vehicles? “The theory behind it is that, regardless of whether you’re a member of a DB pension plan or a DC pension plan or an RRSP, everybody should be entitled to roughly the same amount of contributions and tax-sheltering of those contributions,” explains Vincent. “Nobody should be able to get an advantage because they are part of a particular plan.”
South of the border, tax-sheltering rules are more generous because “the U.S. tax system is much less onerous to high-income taxpayers,” Vincent adds.
The lower Canadian limits for voluntary retirement contributions mean that players on U.S. NHL teams have an advantage over players on Canadian teams, says Greening.
“We’re having ongoing dialogue with the Canadian federal government, as we would like there to be a level playing field for Canadian and American NHL clubs,” he explains. “In addition, players prior to unrestricted free agency do not have control over what country they play in.” (An unrestricted free agent is a player who can sign with any NHL club, with no compensation owed to his previous club.)
Minding the Net
Despite the differences in the amounts that Canadian and American NHL players can put away voluntarily, contributions within the DB plan work the same way for all athletes.
Players collectively contribute $38 million per season to the plan, says Greening, adding that the first contribution was in April 2013. The $38 million comes out of the players’ 50% revenue share at the end of each season, he explains. After this annual sum—along with other benefits costs—is deducted from the athletes’ revenue share, the rest of the money goes to player salaries. Earnings vary, but every athlete has a contract stipulating how much he’ll earn per season. That money is paid out semi-monthly during the season.
Under U.S. law, the plan can start paying the maximum pension benefit to players once they turn 62, explains Berman. The current maximum benefit under U.S. law is a little over $200,000 a year, but that number gets adjusted annually to inflation.
To get the maximum benefit, a player needs 10 years of service or more, says Berman. If an athlete plays for fewer years, his benefit decreases. So, five years of service would bring a benefit about half the size of the maximum, she adds.
“There’s a lot of wear and tear that comes with playing for 10 years, at 82 games a season,” McGowan explains. “That money is more hard-earned than people think.”
U.S. law also allows players to collect pensions as early as age 45—but, in that case, the maximum benefit is less than $200,000, McGowan notes. “So it’s really important for players to understand what that promise is and what it isn’t.”
Changing on the Fly
Besides the fact that it has a unique design and a young membership, the NHL players’ plan is unusual in another way: it defies North American trends.
“Most companies want to move away from DB plans because of the volatility of the cost,” says Frazer. “There’s a huge trend in the industry toward DC. The NHL plan would be the only one I can think of where someone is moving from DC to DB.”
Although it’s a rare move within the larger pension industry, DB plans are more typical in sports, says Peter Landers, a partner at Global Governance Advisors (a Toronto consulting firm). Other major sports leagues in North America—such as the NFL and the NBA—have DB plans, too, which seems to be the reason NHL players bargained for it, he explains.
DB plans make sense in the sports world due to the members’ shorter careers, Landers adds. Having a shorter career, and, therefore, a more limited time frame to save, makes a guaranteed retirement benefit all the more necessary—and DC pension plans don’t provide that level of guarantee, he says.
No matter how long the individual careers of NHL players last, they now belong to a DB plan that goes a long way toward addressing pension inequities north of the border. But outside of that plan, Canadian players will continue to live with greater restrictions on voluntary retirement savings.
Meanwhile, the new NHL season is here. Can you pass the remote?
Yaldaz Sadakova is associate editor of Benefits Canada.
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