This article was originally published in Blakes Bulletin on Pension & Employee Benefits-August 2004
The Canadian Association of Pension Supervisory Authorities (CAPSA) has released its Proposed Regulatory Principles for a Model Pension Law, offering solutions to the burdensome and costly administration of multi-jurisdictional pension plans, and calling for an updated Memorandum of Reciprocal Agreement.
Multi-jurisdictional pension plans are an important aspect of Canada’s benefits landscape. According to Statistics Canada, 2,784 private sector pension plans (23% of all private sector plans, other than those registered with the federal Office of the Superintendent of Financial Institutions) had members in more than one province as of 2002. Over 1,000 of these plans had more than a million members in five or more provinces.
The application of the Memorandum of Reciprocal Agreement – a 1968 inter-jurisdictional convention facilitating the administration and regulation of plans with members in more than one jurisdiction – was recently called into question by the Leco decision. While many may be skeptical about the "quick" adoption of a Model Law in all Canadian jurisdictions, going through the exercise of creating one allows for a healthy examination and comment on the problems in today’s pension legislation.
CAPSA’s Proposed Model Law: A Commentary
CAPSA has proposed a two-step approach to resolving the difficulties faced by multi-jurisdictional pension plans. Namely:
ONE. Revise and Update the Reciprocal Agreement: The Agreement is dated and unclear, and CAPSA is already working on a revised version as an interim measure until a model law can be implemented. That version will not, however, address the larger issue of how best to streamline administration of multi-jurisdictional pension plans for the longer term.
TWO. Develop a Model Pension Law Proposal: CAPSA proposes regulatory principles for a model pension law for federal and provincial jurisdictions based on the following objectives:
(a) Set minimum pension standards;
(b) Provide maximum flexibility, simplicity and clarity;
(c) Streamline requirements and avoid over-regulation; and
(d) Ensure effective harmonization.
While the Model Law harmonizes many current practices without significant changes, a number of the proposals diverge from the existing standards and may be controversial.
"Final Location". Principle 2 clarifies entitlements of plan members who have accrued benefits in two or more jurisdictions by proposing a "final location" approach for calculating benefits upon termination of employment, retirement or death. Benefits would be calculated using laws of the jurisdiction in which a member last accrued benefits, rather than the "checkerboard" approach that requires a plan administrator to look at the service of an individual in each jurisdiction and apply that law to the relevant portion of the individual’s service. This has been the approach adopted by most regulators in the past, although Imperial Oil was recently challenged in Ontario. (That case was settled.)
Prior Notice of Amendments. Principle 4 proposes administrators provide notice of an amendment to the pension plan to all members and any collective bargaining agent representing members "within the prescribed period of time" before the effective date of the amendment. This type of notice could not simply be deferred until the annual statement and, since it does not impose any member or regulatory consent requirement, it may be seen as more of an annoyance. The Model Law is also unclear what the time period will be.
Plan Administrator. Principle 5 proposes the administrator for a pension plan that is not a multi-employer pension plan or "prescribed plan" (that is, a small pension plan, a plan whose administrator is appointed by the regulatory authority or a plan exempted by the regulatory authority) must be a pension committee with at least two members designated by plan members – one by active members and another by non-active members. The plan may also provide for other members to be designated, usually by the employer. Based on the experience in Québec, pension committees would likely end up having a majority of three or more members designated by the employer, who would retain the authority to determine the provisions of the plan. The experience in Québec has not been positive. Pension plan sponsors question the utility of a committee whose employee representatives can always be outvoted. In addition, concern over liability has also led some members to refuse to become pension committee members. The view of labour unions appears to be that there is not sufficient value in the pension committee to accept any "diminution" in the member rights in support of harmonization. This principle should be reconsidered by CAPSA.
Contribution Holidays. Principle 8 states that an employer may take a contribution holiday according to the terms of the pension plan and the requirements prescribed under the pension legislation. The proposed principles do not indicate whether it will simply be the most recent plan terms, which govern the right to take contribution holidays, or historical terms. Experience has clearly indicated that an analysis of historical terms may lead to litigation since prior legislative and administrative requirements may have ambiguous language. It would be preferable to have a legislative override to plan provisions in the area of contribution holidays. Such a provision would, though, be controversial with members.
Vesting. Principle 15 proposes all pension benefits be vested immediately for all plan members’ service and that vesting be retroactive.There would be an absolute cost and administrative burden to this proposal. Many employers might be willing to accept the cost of immediate vesting because of the proposed elimination of partial plan wind-ups. However, employers might solve the administrative cost of immediate vesting by changes to the eligibility rules.
Phased Retirement. Principle 17 provides the option for plan members to opt to take an early reduced pension benefit where an active member and employer have agreed on a reduction of the active member’s hours of employment. The proposals suggest an active member who elects to be paid a partial pension continue to accrue benefits under the pension plan. There is some uncertainty as to how those additional benefits would be determined. The existing Québec and Alberta rules regarding phased retirement, for example, are not acceptable to some. There is also a strong view that administrative complexity in this area should be avoided or else employers will be discouraged from entering into such arrangements.
Pension Splitting. Principle 22 allows benefits to be paid to the spouse or former spouse of the member in the event of a divorce or separation, including an amount in excess of 50% of the pension, if so ordered by a court. Some maintain this produces a costly and complex exercise in most jurisdictions for the member and spouse, and for the plan, exacerbated by different definitions of spouse, and the distinction between rights of property equalization and support obligations under family law in the provinces. There must be clarification and uniformity. CIA officially supports deferred settlement. Some employers, however, prefer immediate settlement for ease of administration and finality of settlement between spouses. Deferred pension could then be offered as an option under the plan if the employers wish and the rules are clear.
Sale of Business & Successor Pension Plans. Principles 25 and 26 suggest the current rules continue. However, integration of these rules with the elimination of the partial plan wind-up provision will require clarity. That is, will there really be no effect where, on a sale of a business, a successor employer refuses to provide a pension plan for the "transferred employees"?
Conversion and Division of Pension Plans. Principle 27 simply states that the merger of two or more pension plans "is subject to the prescribed conditions and the authorization of the regulatory authority." No guidance is provided as to what the prescribed conditions will be. Given the Financial Services Commission of Ontario’s virtual moratorium on pension plan mergers, it is vitally important to understand what mergers will be acceptable. It is not an overstatement to say that, to the extent the regulatory authorities impose conditions upon mergers that effectively prohibit plan mergers, negative consequences to pension plan continuance and funding are likely. The Model Law is equally vague as to what is required to convert a pension plan. Again, clarity is required and conversions should be permitted if voluntary pension plans are to be promoted. Also, harmonization on conversion conditions should be established. For example, it does not seem fair in a national pension plan that some members, such as those in Québec and Nova Scotia, get benefits on a projected basis while others do not.
Commuted Values on Involuntary Termination. Principle 29 states that, where a member terminates from a plan as a result of events not initiated by the member, the member’s benefits should be calculated as prescribed. CAPSA says it "welcomes comments and suggestions regarding the calculation of members’ commuted values on sale of business, plan termination and plan conversion". While it is not entirely clear what it intends, CAPSA suggests that in light of the elimination of partial plan wind-up another form of enhanced benefits should be provided. This seems misguided. A form of severance should not be enacted through a voluntary pension system, but rather through employment standards legislation.
Unlocatable Beneficiaries on Plan Wind Up. Principle 32 provides that, where assets remain in a terminated plan and the administrator is unable to distribute to the appropriate beneficiaries after making reasonable efforts to do so, the outstanding amount will be referred to a public agency. This proposal would be helpful if such a public agency existed in every jurisdiction, but it does not. The Public Trustee in Ontario, for example, has been reluctant to hold funds for unlocatable beneficiaries. A more practical suggestion might be for the plan sponsor to hold the funds or hire someone to do so on their behalf, and have obligations to make attempts to locate beneficiaries at retirement age.
Partial Wind Up. Since the Model Law proposes immediate vesting of all benefits, the concept of a partial wind up is proposed to be eliminated (Principle 32).Without a partial windup requirement, the considerations in the recent Monsanto Canada case become unnecessary. One can expect labour to oppose this change vigorously because of surplus issues alone. Plan sponsors, on the other hand, will likely see this as the most beneficial provision of the Model Law.
Surplus Withdrawal. Principle 33 states that any proposal for a surplus withdrawal by an employer from an ongoing or terminated pension plan must have the agreement of at least two thirds of the active and non-active members of the pension plan, or the consent of collective bargaining agents. The provisions move to a surplus-sharing regime with no entitlement option. This may draw resistance from both sides of the industry, sponsors and members. The proposals also provide the same surplus-sharing regime will apply to ongoing and plan terminations. This is a liberalization of access to surplus. Labour is likely to react negatively to this liberalization. The provisions also provide that if no surplus application is received within the prescribed time period that the matter can be sent to arbitration. No details are provided on the time period to be prescribed and, more importantly, the basis upon which the arbitrator will decide. That is, will it be legal entitlement-based, contribution-based, etc.? To understand the viability of this proposal it is necessary to understand these details. The principles also propose if no arrangement is reached and no request for arbitration is made within a prescribed time period, the surplus will be deemed to be owned by the members. This would seem to be an ineffective provision that will simply mean that time will be watched, and where necessary talks will be halted, and the matter will be sent to arbitration. This does not seem helpful.
Surplus in Mergers and Sales. Principle 33 also leaves open for discussion how surplus will be dealt with in plan mergers and business sales. We suggest the current rules in Ontario, prior to the confusion surrounding the Transamerica case, should be retained. That is, in a merger, the surplus can be used in the merged plan as long as the pension plans do not prohibit. In a sale of a business, a pro-rata to liabilities transfer of surplus is permitted and a greater transfer of surplus is treated as a surplus withdrawal.
Power of Regulatory Authority. Principle 35 grants the regulatory authority the power to require the administrator to hold a meeting of plan members or other beneficiaries, and to assess regulated persons for regulatory activities on a user-pay basis. It is unclear what meetings are anticipated and what additional fees are being contemplated.
Rule-Making. Principle 37, in an effort to streamline the regulation making process, grants the regulatory authority the ability to make rules governing matters of a technical or administrative nature, which have the force and effect of a regulation, subject to Ministerial oversight. The Model Law also envisions a role for CAPSA in rule-making to encourage harmonization. To the extent that notice and comment provisions provide safeguards, this would seem useful. The political sensitivity of pension plan changes seems to result in even the most procedural of amendments being lost in the political quagmire.
Reporting by Advisors. Principle 40 aims to clarify the duties of advisors. The principles propose persons retained or employed by the administrator must report to the regulatory authority any material contravention of the pension legislation or regulation that is not corrected by the administrator. The question of who must report "material contraventions" and what matters must be reported, needs to be answered before it is possible to consider this proposal.
Review of the Act. Principle 46 proposes that every five years, the regulatory authority shall undertake a review of the Act and regulation to ensure the continuing effectiveness and harmonization of pension legislation across Canada. This seems valuable, but the question is whether there is the political will needed to make the changes that a review uncovers. It should also be noted that a major omission from the Model Law is any consideration of issues relevant only to defined contribution arrangements. The next draft of the proposals, hopefully, will correct this significant deficiency. The Model Law offers an interesting opportunity to streamline pension plan administration and "solve" many of the difficulties in pension plans in Canada. A number of the proposed Principles, however, require significant expansion before they can be considered.
A copy of the CAPSA proposals can be found at www.capsa-acor.org.
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