Christopher Brown, a partner with Spectrum HR Law LLP in Calgary, says the current patchwork of provincial and federal pension regulations “has delivered a level of complexity that serves not only to drive up costs but [also] to drive plan sponsors away from sponsoring pension plans at all.” For decades, pension lawyers have advocated in vain for a more harmonized regulatory environment across the country.
Under current rules, national sponsors must register traditional pension plans in the province where a plurality of their workers are located.
“Then, if you have employees across the country, you’ll have an appendix for each province,” says Elizabeth Brown, a partner with Hicks Morley LLP in Toronto.
That means considerable time and money spent on lawyers, consultants and actuaries to cover myriad different provincial rules on vesting periods, survivor benefits and partial windups, to name but a few. Data in a 2009 C.D. Howe Institute report on pension uniformity suggest that the administrative costs involved in sponsoring plans in multiple jurisdictions are likely well above $1 billion annually.
Not only are these costs unnecessary, says Brown, but national employers also run the risk of committing costly errors due to the uneven regulatory environment.
“We have a system in Canada that is completely different than that in the U.S., which has a pre-emptive federal pension law [the Employee Retirement Income Security Act (ERISA)],” she explains. “So in the U.S., when you have a dispute and you have case law, all the judges in the country are dealing with the same legislation, whereas here, we’re dealing with different statutes.”
To illustrate the challenge facing national employers, consider a 2010 decision by the Court of Queen’s Bench of Alberta in Halliburton Group Canada Inc. v. Alberta. The case turned on an attempt by Halliburton to convert its pension plan’s design from DB to DC. The sticking point was whether freezing the defined pension benefit at a future date would amount to a reduction in members’ accrued benefits. The court upheld an earlier decision by the Alberta superintendent of pensions to reject the requested amendments because benefits were calculated on the basis of a member’s final average earnings.
While not necessarily binding in courts outside of Alberta, the Halliburton decision had employers in Ontario scrambling to figure out whether or not the ruling was going to be picked up by the Ontario regulator.
“If we had one uniform law, obviously we wouldn’t have this problem,” says Brown. “If there were a case in Alberta that dealt with the exact wording of a provision that we are also bound by in Ontario, we would know that would be something we have to comply with.”
Around the obstacle we go
Ken Burns, a partner with Lawson Lundell LLP in Vancouver, says there is little appetite politically to untangle the mess by harmonizing current provincial laws. That’s why Ottawa wants to focus on solutions that don’t step on provincial jurisdiction.
In this regard, the PRPP proposal is significant.
“Pension standards have evolved out of employment law,” says Burns, which explains why plans are always sponsored by an employer, a group of employers or employees. The self-employed don’t participate because there’s no such relationship.
“The PRPP instead takes the approach that pension plans can be looked at as a financial product, in the way RRSPs are treated like a financial product, administered by a financial services institution.” In this regard, the federal government can take the lead in implementing the tax framework to make the plan work.
“What is significant is the proposed federal tax rules for PRPPs, because, on the tax front, the provinces generally follow Ottawa,” says Monet.
Ultimately, PRPPs—like RRSPs—are just another voluntary savings program, which (in theory) charge lower fees because the funds are pooled. If Ottawa and the provinces do succeed in setting up a well-regulated program, some observers expect to see employers that currently offer DC plans switch to offering PRPPs instead, as long as things are made simpler for them.
With financial institutions sponsoring PRPPs, employers need not worry about assuming the costs and fiduciary obligations associated with offering pensions to employees—all of which are outside of their core business.
“Small employers are the big target here,” says Burns. “They just have to go along for the ride and not do any administration.” In that sense, he adds, “harmonization is going to be enhanced to a small degree because the federal government is driving the initiative as much as it can under the Income Tax Act.”
But as flexible and convenient as PRPPs may be for the government and private employers, they expose employees to market risk, much like traditional DC plans do. That means employees are placed in a position where they have to make decisions on investments. And not everyone is equipped to do that.
What’s more, says Frazer, “some provinces may introduce voluntary PRPPs and others may introduce mandatory PRPPs.” This presents two problems.
First, “there is a view that says that if you want to really expand pension coverage, you should make it mandatory,” says Frazer, who told the Standing Committee on Finance in February that there are concerns “that PRPPs may not provide adequate retirement income for Canadians.”
Read: Are PRPPs the gateway to compulsory pensions?
Second, different treatments from different provinces “will definitely increase the administrative burden for those eligible administrations offering a plan national in scope.”
Canada could very well end up with two patchwork regimes in place: one governing traditional pension plans and the other governing PRPPs. Think of it as a typically Canadian solution to uniquely Canadian problems.
Yves Faguy is senior editor with National magazine, a legal affairs publication of the Canadian Bar Association.
Get a PDF of this article, including a table comparison of retirement savings plan types.
For ongoing coverage of PRPPs, visit benefitscanada.com/prpp.