Times of Change

In 2007, the governments of Alberta and B.C. established the Joint Expert Panel on Pension Standards. The purpose of the panel is to conduct an independent review of pension standards in both provinces, and to make recommendations for reform to sustain and improve the private pension system. Per the panel’s discussion paper, A Better Pension System for the Future: Finding a Balance, the review focused on the following questions. What is good in the current system and should be preserved? What is wrong with the current system and should be changed? What other improvements could be made to the system now and for the future?

Through its discussion paper, the panel sought input from stakeholders on a wide range of topics, including the role of the employer in providing retirement security, the definition of the pension deal, the pros and cons of regulating governance, minimum funding standards, safe harbours for DC plans and problems posed by legacy issues in pension plans. The panel received more than 100 stakeholder submissions in response to the paper and held discussions with a number of interested groups.

While the opinions expressed by stakeholders were not unanimous, a number of themes emerged from their submissions, including the need to facilitate pension deals that encompass a range of risk-sharing arrangements, general opposition to the institution of a pension benefit guarantee fund to provide benefits security, and the value of a safe harbour for both members and sponsors of DC plans.

As the panel’s report will not be released until later this fall, it is premature to speculate on what it will contain. However, given its mandate to improve the private pension system, it’s hoped that the recommendations will enhance certainty regarding stakeholder rights and obligations, and facilitate plan designs that better align governance with responsibility for risks and entitlement to rewards.

The Road Ahead

With so many pressures facing plan sponsors, the pension landscape in Western Canada will continue to change—but it is difficult to predict exactly how. It’s hoped that the panel’s recommendations will lead to meaningful changes to pension legislation in Alberta and B.C. to promote the continued viability of both DB and DC plans. Recognizing and facilitating a range of clearly defined risk-sharing arrangements for DB plans and introducing a DC safe harbour would be welcome changes, resolving existing drawbacks to all plan design types and potentially resulting in an increase in overall pension coverage.

Taking an optimistic view, what would the future of pension plans in Western Canada look like? The panel’s recommendations could facilitate new types of plans with both DB and DC components. For example, the fixed contribution, variable benefit model that is popular in multi-employer situations in B.C. could be a model for single-employer pension plan designs, as employers in Western Canada seek innovative ways to attract and retain scarce talent, and define themselves in the marketplace while reducing corporate finance volatility.

Clarity around the extent of the employer’s responsibility for employee and employer choices could be a boon for DC plans. With this clarity, some employers will support lifecycle funds and other measures to help improve investment returns for employees who are apathetic or uninformed about investment fund selection. At the same time, employers will continue to offer employee education initiatives to help individuals make sound and responsible retirement savings decisions. If the panel recommends safe harbour rules for DC plans and these recommendations are implemented, we might see more employers seeking out better, lower-cost investment funds for their employees.

Many plan sponsors in Alberta and Saskatchewan have closed DB plans and are looking for economical and practical ways to exit the DB pension business, or at least mitigate the effects of these plans on income from their current operations. Other than purchasing annuities, with the related increase in cost and immediate accounting implications, options have been limited. Clarity around accounting rules, and the use of surplus and letters of credit to manage security for these benefits, could open the door to pension buyouts, liability driven investing, longevity insurance and other creative approaches to managing closed DB plans.

Changes to the measures of DB pension values in accounting and commuted value standards, along with clear risk-sharing arrangements, could shift the balance from the overpricing of DB pensions and restore plan sponsors’ abilities to invest long term.

However, there are also more pessimistic possibilities. The absence of safe harbour legislation, together with a few precedentsetting court cases that make employers responsible for unsuccessful outcomes in the savings plans they sponsor, could be enough to convince many employers that meddling in their employees’ retirement savings arrangements just isn’t worth the risk.

Furthermore, a mark-to-market approach to solvency funding regulations, commuted values, corporate accounting and asset distribution on business transactions such as downsizing and divestitures means that DB pension assets must remain liquid and closely track pension settlement values. Riskminimizing investment strategies can make

DB pensions more expensive than personal savings. Employers and employees could therefore come to believe that pension plans detract from the total rewards package.

While it is too soon to know what the panel will recommend, the report will have significant implications for pension legislation in Alberta and in B.C. It is also possible that the panel’s recommendations could serve as the starting point for similar changes to pension legislation in the rest of Canada. Accordingly, plan sponsors should review the forthcoming report and advocate for the recommendations that they think would best ensure the viability of both DB and DC plans.

Labour market challenges, coupled with changes to accounting, actuarial and pension standards, point to interesting times ahead for pension plan sponsors in Western Canada. In a region known for innovation and creative approaches to issues, changes to the pension landscape in the West could provide the blueprint for developments throughout Canada. Unfortunately, stakeholders will have to wait and see what the future holds.

Laura Samaroo is retirement practice leader, Western Canada; Karen DeBortoli is director, Canadian Research & Innovation Centre; and Doug Chandler is senior consultant, retirement, Western Canada, with Watson Wyatt. laura.samaroo@watsonwyatt.com; karen.debortoli@watsonwyatt.com; doug.chandler@watsonwyatt.com

> click here for a PDF version of this article

© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the October 2008 edition of BENEFITS CANADA magazine.