Ensuring the Ongoing Strength of Canada’s Retirement Income System

By Lyne Duhaime

There are lots of recent activities in the pension field at the federal level in Canada. The government’s actions in the past 12 months constitute the most important reform of federal pension laws since the 1980s. Here’s a quick overview.

It started on January 9, 2009, when the government of Canada released a discussion paper titled “Strengthening the Legislative and Regulatory Framework for Private Pension Plans Subject to the Pension Benefits Standards Act, 1985.” This was followed by a series of public meetings across Canada. They were led by Ted Menzies, Parliamentary Secretary to the Minister of Finance. Concerned stakeholders had the opportunity to make their views known to the government by speaking at one of the public meetings or by making written submissions. The government received a wide range of advice.

On October 27, 2009, the Minister of Finance announced measures to modernize the federal private legislative and regulatory framework -– Minister of Finance Modernizes Federal Pension Framework. On March 29, 2010, a series of proposed amendments was introduced to legislation governing federally registered pension plans. These were included in Bill C-9, which covered a wide range of tax and other matters.

This pension reform bill covers many different subjects, such as:

• immediate vesting of benefits;
• introduction of a new regime of variable benefits out of a defined contribution plan;
• new funding requirements with greater clarity as to requirements that apply to single employer plans and those that apply to multi-employers plans;
• detailed new rules around the use of letters of credit;
• the expansion of the void amendment provisions, which would render void an amendment that would bring the solvency ratio of a pension plan under a certain level or would increase benefits when solvency is already under that ratio;
• the introduction of a new Distressed Pension Plan Workout Scheme, which would allow limited opting out of the funding rules if members and other beneficiaries agreed, and the Minister of Finance consents;
• the surplus “cushion” that a defined benefit plan is permitted to have increases from 10 percent of liabilities to 25 percent of liabilities.

Then, on May 3, 2010, the federal Minister of Finance released draft Regulations Amending Certain Regulations made under the Pension Benefits Standards Act, 1985. The proposed amendments include:

• A new standard for establishing minimum funding requirements on a solvency basis that will use average, rather than current, solvency ratios;
• The introduction of a solvency margin that would preclude sponsors from taking contribution holidays unless the solvency ratio exceeds full funding plus the margin, the margin being set at a level of 5 percent of solvency  liabilities; and
• The removal of the 5, 15, and 25 percent quantitative investment limits in respect to resource and real property investment, while retaining the 10 percent and 30 percent limits.

The coming into force of the regulations isn’t dependent on the progress of Bill C-9. The government declared its intent that the proposed amendments apply to valuations of 2009 that must be filed by June 30, 2010.

In addition to the reforms described above, on March 24, 2010, the Minister of Finance announced the launch of online consultations in a series of cross-country roundtable discussions, speaking engagements, and town hall meetings. The purpose is to gather input from Canadians on a consultation paper called “Ensuring the Ongoing Strength of Canada’s Retirement Income System.”

In its consultation, the government is asking the following 10 questions:

1. What are the main issues/challenges that Canadians face in saving for retirement?
2. What is the appropriate role of governments in supporting Canadians to achieve adequate retirement income?
3. Does the retirement income system currently have the appropriate mix of public and private support?
4. Are changes needed to further strengthen Canada’s retirement income system?
5. Should there be more mandatory retirement savings?
6. Should individuals be auto-enrolled in any new voluntary savings program?
7. Should increased savings, whether mandatory or voluntary, be locked in for retirement purposes only?
8. Should there be more flexibility in choice with respect to private savings options?
9. How would the approaches described in this paper impact you personally and/or your business?
10. How should any changes to the retirement income system be financed?

These are certainly very important and far-reaching questions. This is a somewhat unique opportunity for employers, unions, and any stakeholders to respond.

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  Lyne Duhaime