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Benefits and Pensions Monitor

Everybody’s Talking About It … But

By: Priscilla H. Healy

Has the introduction of CAPSA’s Model Law Principles in January 2004 had an impact on how pension legislation is developing across the country? Priscilla Healy, of Pallett Valo, looks at what has happened with pension legislation in the provinces over the last year.

The balkanization of pension legislation may have dropped down in relative importance as a factor in discouraging the maintenance of pension plans in Canada. The primary focus is the greatly heightened employer and member concerns as to funding over the past two or three years.

The flip side of funding concern is the treatment of surplus in various contexts by regulators and the courts.

But lack of uniformity of pension legislation is still a significant irritant and a largely unnecessary cost to employers and administrators.

Almost everyone gives lip service to uniformity, or at least harmonization of pension legislation. In recent years, governments across Canada have nearly always referred to harmonization as a consideration in press releases accompanying their amendments to pension legislation. Recently, even the International Monetary Fund seems to have caught a disquieting glimpse of our patchwork system of pension regulation in its recent recommendation that the regulation of Defined Benefit pension plans be harmonized.

Pension regulators seem to have abandoned hope that governments will enact uniform pension statutes, or that provincial governments will cede authority to a central regulator. Those concepts, however rational, have been broached and explored in the securities field where the economic pressures for uniformity and centralized regulation are strong and incontrovertible. I refer to the ‘Wise Persons Report’ and the preparation of a uniform act by securities regulators. Neither approach has met with great success in that field.

Greater Harmony
The best we may be able to hope for in pension legislation is greater harmony of legislation. Unhappily, politicians cannot embrace even the concept of harmony. There is always a little (or a big) tweak each jurisdiction wants to give its own legislation and that leads to discordance.

It does not have to be this way. By and large there is not much disagreement about most of the aspects of pension legislation. Disputes as to surplus, although they get media coverage and are very costly to sort out, impact relatively few pension plans.

The Canadian Association of Pension Regulatory Authorities (CAPSA), the association of the senior pension regulators across the country, claims its mission is “to facilitate an efficient and effective regulatory system in Canada.” After a two-year discussion amongst themselves and some industry consultation, CAPSA issued a set of Model Law Principles in January 2004. It was close to miraculous that the members of CAPSA arrived at agreement on the content of such principles.

At any rate, after a six-month period for public comment, CAPSA received more than 40 responses, a number of which were extensive and detailed.

CAPSA then issued a further annotated version of the principles, dividing them into three categories. I will call those categories, for the purposes of this article:

• ‘Agreement Possible’
• ‘Needs More Thought’
• ‘Too Hard’

The principles in the ‘Too Hard’ category include surplus and partial wind-up issues. CAPSA then set up an industry task force to address the principles in the ‘Agreement Possible’ category, hoping to arrive at a consensus. The idea is to take that consensus to governments and persuade them, when their minds are even directed to pension legislation, to address matters covered by those principles in a uniform manner.

The principles in the remaining categories are to be approached more gradually.

Modest Plan
This seems to be a practical, if not modest, plan. The industry task force method has been used very successfully in establishing a regulatory regime for capital accumulation plans and, before that, a regime for plan governance. The industry task force model may well work in relatively non-contentious areas. The capital accumulation plan and governance areas were without the long history of employermember litigation that has characterized Defined Benefit plans since the mid 1980s.

Given the issuance of the Model Law Principles, we could expect that governments might have regard for them in new legislation. This article will survey pension legislation since January 2004 to see the extent to which there has been government buy-in. What governments have not done may be as important as what they have done.

British Columbia
There has been no new legislation of significance recently. The former superintendent, Sherallyn Miller, was a strong proponent of uniformity and the last fairly comprehensive revision of British Columbia pension legislation in 1999 reflected that influence. Some amendments to the regulations have been made to give further flexibility in respect of LIFs and lock-in RRSPs.

Alberta
Alberta has recently introduced Bill 35, the Employment Pension Plans Amendment Act. The proposed legislation does not seem to detract in any important way from uniformity and it does incorporate one of the Model Law Principles that would be useful across Canada; that is the Principle that would allow the administrators of terminating pension plans to turn over funds to the Public Trustee on behalf of members who cannot be located.

Saskatchewan
David Wild, the superintendent of pensions in Saskatchewan, is the chair of CAPSA and of the CAPSA Model Law Committee. Nonetheless, Saskatchewan did go ahead with unlocking pensions on retirement, a feature not permitted in other jurisdictions. Locking-in is a sensitive area in pension regulation. Saskatchewan’s position may, or may not, be incorporated into the Model Law Principles when they are finalized.

Changes introduced in the Pension Benefits Amendment Act in May 2004, to come into effect as of June 2005, dealt with flexible pension plans (including optional ancillary contributions), introduced a spousal waiver of the survivor benefit, increased the threshold for unlocking small benefits to match that in Alberta and British Columbia, and unlocked the spousal (preretirement) survivor benefit. Such provisions either reflect the Model Law Principles, or are consistent with provisions existing in other jurisdictions. The new legislation also requires all years of service to be included in calculating the commuted value of the death benefit in a calculation that reflects neither the Model Law Principles nor other Canadian pension legislation.

Manitoba
Rather than waiting for a consensus movement towards putting into effect any of the important Model Law Principles, Manitoba has jumped the gun and gone ahead with Bill 10 incorporating many of the Model Law Principles – so far so good when we are talking about changing the survivor pension to 60 per cent of the member’s pension to be consistent with the other Canadian jurisdictions.

Bill 10 is premature when it comes to mandatory pension committees, including plan members, and immediate vesting. Both of those provisions are found in the Model Law Principles, but both were subject to much negative comment and may be modified when the Model Law Principles are finalized.

Moreover, Bill 10 includes some provisions that are consistent with those of a minority of other jurisdictions, where the provisions have been seriously called into question in the commentaries on the Model Law Principles. It also retains a flavour unique to Manitoba, its requirement for mandatory membership in pension plans.

It can be said that Manitoba’s departure from Model Law Principles, and its adoption of others, was a thoughtful exercise with a conscious attempt at uniformity.

Ontario
Warned (and wary) of much needed amendments to surplus related provisions in Ontario’s legislation (owing to the wellorchestrated opposition to Bill 198 which did little more than codify the approach or practice in most other jurisdictions), the Ontario government has done little except react to the current funding and Pension Benefits Guarantee Fund issues. It is abruptly limiting the use of the exemption for solvency funding in section 5.1 of the regulations, and is passing some housekeeping regulations.

On a more hopeful note, Minister Greg Sorbara does support a single securities regulator and might be persuaded to support harmony of pension legislation if he ever has the opportunity to turn his mind towards pension legislation.

Quebec
Many progressive ideas come out of Quebec, although one would wish they would come out in a simpler form. Many are incorporated into the Model Law Principles.

Since January 2004, Quebec has passed regulations with respect to Quebec’s Simplified Pension Plans making them a more attractive option for Defined Contribution plans. The Model Law Principles contemplate simplified pension plans and CAPSA will probably use Quebec’s legislation as a model, or at least as a jumping off point.

On the other hand, Quebec tabled Bill 195 in May of 2004 that would make it even more difficult for employers to take contribution holidays. To amend the contribution provisions in a pension plan going forward, current legislation requires the concurrence of all unions which cover employees participating in the plan. A special notice must be sent to plan members prior to the application of the confirmation option. However, when the confirmation process is completed, the plan provisions prevail. The proposed amendment requires the consent of the non-unionized active members and of the non-active members, the consent to be confirmed by a majority vote of each of the two groups at the next annual meeting or a special meeting of plan members. Quebec’s requirements for contribution holidays are peculiar to Quebec and, to some extent, are the outcome of judicial decisions and considerable political pressure in that province. However, they do nothing to facilitate harmony in pension legislation.

New Brunswick
New Brunswick seems to be missing the opportunity to amend its regulations to provide for the same priorities on the wind-up of insolvent pension plans as in other jurisdictions. The existing New Brunswick regulations give priority to retirees and near retirees before active members receive any benefit. The consequences of that regulation to the employees at St. Anne-Nackawic who stood to lose years of accrued pension benefits have been disastrous. Amendments to the New Brunswick Pension Benefits Act have been introduced to give the government power to enact retroactive regulations, but it appears that such retroactive regulations will address only the St. Anne-Nackawic situation.

Nova Scotia
Nova Scotia really did try to eliminate ‘grow-in,’ a legislative feature shared only with Ontario, in response to pressure from employers. ‘Grow-in’ benefits members affected by wind-ups or partial plan windups whose years of age and service are at least 55. Because grow-in benefits are contingent on a wind-up or partial wind-up, it is difficult to eliminate the concept of a partial wind-up suggested in the Model Law Principles in jurisdictions with grow-in in their legislation. At any rate, counter pressure from the member side prevailed to some extent and Nova Scotia retained grow-in, but eliminated the requirement to fund for grow-in, and placed grow-in benefits below all other benefits as priorities on wind-up. This legislation gives rise to some interesting issues as to priorities on the wind-up of solvent multi-jurisdictional plans with members in Ontario and Nova Scotia. It is an example of legislative tweaking that may be well-founded conceptually, but further complicates the administration of pension plans.

Newfoundland
No legislation of significance has been enacted recently.

Federal
The federal government has been preoccupied with the funding of the Air Canada pension plans and has done nothing of general legislative significance.

Can governments respond to current issues?
On the credit side:

• Most jurisdictions have enacted legislation incorporating CAPSA’s policy on flexible pension plans.
• Governments did all finally respond, although a little late, to the requirement to amend the regulations providing for the application of the new Canadian Institute of Actuaries’ (CIA) Standard of Practice for Determining Pension Commuted Values. Quebec, the last to do so, finally enacted harmonizing regulations, effective a few weeks after the effective date of the CIArequirements.
• The Guidelines on Capital Accumulation Plans, adopted by the Joint Forum on Financial Market Regulation to be effective by the end of 2005, and, to a lesser extent, the CAPSA Guidelines on Pension Plan Governance are good examples of how standards can be adopted and harmonized. But, on the debit side:
• Even now, not all governments have amended their pension legislation to deal with conjugal partners of the same sex. It has been clear since 1995 that such individuals must be accorded the same rights (and responsibilities) as unmarried heterosexual conjugal partners.
• After the Monsanto decision of the Supreme Court of Canada in 2004, we are not aware of any government seeking legislation similar to subsection 70(6) of the Ontario Pension Benefits Act to amend it or to clarify its application.
• The concept of two-thirds member consent to surplus payments to employers on plan wind-up is accepted in nearly all provinces, other than Quebec. But the detailed requirements for member consent are not uniform and some jurisdictions permit a small minority of inactive plan members to hijack a surplus sharing deal. In Ontario, the employer must also jump over the hurdle of establishing historic surplus entitlement.

This article is not intended to be critical of the efforts by the pension regulators to press forward with uniform pension legislation, without, we suspect, much encouragement from their respective governments. Pension legislation is something from which governments shy away. The positive political payoff is doubtful and the negative political effects can be alarming. It is the regulators on whom we must count to keep up pressure on the politicians.

It is to be hoped, though not expected, that some strong minister will take the lead in pressing his or her colleagues to the realization that Defined Benefit pension plans are good for employees and that a regulatory environment that is friendly (or at least non-hostile) helps all stakeholders. By and large, the regulators and the pension industry on the employer/ administrator side are doing what they can to help create such an atmosphere. Stakeholders who value Defined Benefit pension plans, but who criticize government efforts to pass legislation that is in any way favourable to employers, might contemplate the story of the man who murdered his parents and asked for the mercy of the court on the grounds that he was an orphan.

Priscilla H. Healy is a lawyer with Pallett Valo LLP.

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