Alberta appears to be moving forward with its pension reform agenda. As you may recall, on December 10, 2012, Alberta's new Employment Pension Plans Act (the Proposed New EPPA) received royal assent, but it has not yet been proclaimed in force. For an overview of the changes in the Proposed New EPPA, see our October 29, 2012 blog post.
Last week, on April 16th, certain changes to this proposed legislation were introduced as Bill 10, Employment Pension (Private Sector) Plans Amendment Act, 2014(Bill 10). The majority of this Bill's changes are quite minor and essentially clarify language in the Proposed New EPPA. In this blog post, I will address a couple of the more substantive changes contained in Bill 10 relating to:
- coversions of plans with a defined benefit (DB) provision to a target benefit provision; and
- annuity purchases.
Conversion of Defined Benefits to Target Benefits
The Proposed New EPPA contains various pension design models, including target benefit provisions. The introduction of target benefit provisions for pensions outside the multi-employer regime is a welcome change. Target benefit provisions are those that provide for fixed contributions, a targeted DB type pension formula and the ability to reduce benefits. The ability to adjust accrued benefits is a distinguishing feature of target benefit plans and requires specific legislation. For more information on target benefit plans, see my prior blog posts on the ABCs of Target Benefit Plans.
Bill 10 contains a new exception to Alberta's void amendment provisions. Pension standards legislation generally prohibits changes to benefits that have been earned. Bill 10 will amend the Proposed New EPPA to provide that if the plan text contains a DB provision, the plan text may be amended, in accordance with the applicable rules, to convert the DB provision to a target benefit provision and such conversion may apply to accrued benefits. Allowing the conversion of accrued defined benefits to target benefits is similar to the New Brunswick pension legislation, which permits the conversion of accrued benefits to shared risk, a type of target benefit plan.
Bill 10 includes new provisions regarding purchases of annuities for ongoing plans and on wind up. Specifically, for ongoing plans the changes would permit the transfer of assets of the plan to an insurance company to buy a life annuity for deferred members or persons who are receiving pensions and entitled to a benefit under a plan's DB provisions. Where an annuity is purchased for a deferred member, the administrator must ensure that the annuity provides the deferred member with the same benefits as the member would have received from the pension plan. Where an annuity is purchased for a person who is receiving a pension, the administrator must ensure that the annuity provides the person with the same amount and form of pension that the member is entitled to under the pension plan.
Importantly, the proposed legislation provides that as long as the administrator complies with the relevant legislative rules in respect of the annuity purchase, the administrator, a participating employer, a former participating employer or another person who was required to make contributions to the plan are discharged from further liability to the person whose benefits were purchased.
There are similar provisions regarding purchases of annuities on wind up. Subject to certain exceptions, the proposed new provisions would require the administrator to buy an annuity for each person in receipt of a pension plan under a DB component of a plan as part of the wind up. The life annuity must provide the same type of benefit and the same income that the retired member is receiving from the plan or be in compliance with the regulations. Again, where the administrator has complied with the relevant legislative rules, the discharge would apply.
Bill 10's inclusion of the discharge language for annuity purchases is an important step in facilitating annuity buy outs. In many other provincial jurisdictions (e.g., Ontario), the pension legislation is less specific and the regulators take the view that plan sponsors remain liable for any future default that causes the annuitized pensions to be less than fully paid. Under the federal pension legislation there are no express discharges at all.
The lack of a certain discharge in pension standards language can sometimes be an impediment to employers considering annuity buy outs in the hope of removing pension liability from their financial statements. If an administrator purchases an annuity in respect of a retired member's pension and the annuity provider becomes insolvent, the administrator could (subject to Assuris limits) still be liable in the absence of an effective discharge.
With the introduction last week of Bill 10 and Bill 9, Public Sector Pension Plans Amendment Act, 2014 (to be discussed in my next post), it is clear that pension reform is important to Alberta's government. As much of the detail for Alberta's new pension rules will be in the regulations, which are expected to be filed before summer, stay tuned for further updates on Alberta's initiatives.
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