The Ontario Expert Commission on Pensions report has left single employer plans on the sidelines.
The Ontario Expert Commission on Pensions (OECP) carried a heavy burden on its shoulders, not the least of which was the burden of high expectations from the sponsors of single employer pension plans (SEPPs). For much of the last 25 years, SEPPs and related issues have been at the centre of pension policy and debate.
Funding problems, concerns about overregulation, benefits security, surplus ownership, contribution holidays, declining pension plan participation, partial windups and grow-ins are among the issues that have given rise to court cases, legislation, plan conversions and enfeebled regulatory authorities. There was hope among SEPP sponsors and members that the OECP would resolve these issues once and for all.
When viewed from this perspective, the OECP report must have been disappointing to the SEPP community. The report contained no recommendations in support of easing funding obligations for SEPPs, did not resolve the surplus debate, lessened the regulatory burden in only modest ways and stiffened certain regulatory requirements. Relief was modest and came in the form of faster approval for plan mergers and plan-to-plan transfers of assets and liabilities.
The recommendations can be interpreted to support the view that the traditional SEPP is an institution whose time has passed. In order to fix the system, the OECP report proposes fundamental change to the way pension plans operate. SEPPs must restructure themselves to become jointly governed target benefit plans (JGTBPs).
A JGTBP will give a voice to its members and retirees in its governance. It will also operate more transparently, be subject to relaxed funding rules and offer target as opposed to defined benefits. As such, a JGTBP will seek to share the risk between plan sponsors, members and retirees. In these senses, a JGTBP will be very similar to a traditional multi-employer pension plan (MEPP).
The concept of a JGTBP carries significant appeal, but it is a sharp departure from previous pension structures. If JGTBPs become the norm, then much of what animated pension controversy will surely disappear. One wonders, in this time of financial crisis, whether some of the positives associated with a SEPP—for example, early retirement benefits—will also disappear. A final concern is whether JGTBPs will be sufficiently attractive to encourage employers to establish them.
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Taking a bold stand is the only way for the debate to move forward toward positive policy resolution. The OECP report sets the stage for a meaningful debate about the future of SEPPs, but in my opinion, it did not go far enough.
The real question is this: does it make sense for society to count on the private sector to provide pensions to a significant portion of the working population? Pensions are essentially a social welfare benefit. In Canada, we do not typically count on private employers to look after the nonworking interests of their employees, let alone their former employees. The government provides hospital care, social assistance, physician services and a portion of pension needs.
We also have to note that SEPPs are not well positioned to weather the inevitable storm (perfect or otherwise) of market downturns, low interest rates or financial crises. Understandably, they are focused on dealing with the vagaries of their own business interests. From this perspective, resources dedicated to pension issues would be freed up and used for issues that more directly relate to the enterprise’s business activities.
Crisis creates opportunity and sharper thinking. From a societal point of view, it is time to recognize the public policy importance of ensuring proper pension coverage. To that end, the observation offered in the OECP report about adding a voluntary second layer to the Canada Pension Plan would seem to make a great deal of sense: the cost is known, the infrastructure already exists and the plan is widely accepted.
MEPPs and jointly governed public sector plans work in those sectors and have stood the tests of time and periodic crisis. For those without pension plans, or for those who belong to SEPPs, the need to move to a different model is clear.
Hugh O’Reilly heads the pension and benefits practice group at Cavalluzzo Hayes Shilton McIntyre & Cornish in Toronto.
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the January 2009 edition of BENEFITS CANADA magazine.