april 28, 2012 paul litner. the canadian retirement income system 2
TRANSCRIPT
The Canadian Retirement Income System
Canada’s retirement system as a “three pillar” model Government-sponsored programs
(CPP/OAS) Personal savings (RRSPs/TFSAs) Employer sponsored retirement plans (Group
RRSPs and RPPs)
Most common form of RPPs: Defined benefit (“DB”) pension plans Defined contribution (“DC”) pension plans
2
Trends in the Canadian Retirement Income System
Declining participation in private sector DB plans Private sector membership in DB plans declined
3.6% in 2009 (Statistics Canada, 2011)
Overall participation in any private sector employer sponsored pension plan declining number of workers in the private sector with
pension coverage has declined by 2.1% (Statistics Canada, 2011)
DC plans failing to deliver? Expected retirement age of Canadian workers
has increased from 60 (in 2007) to age 67 (2011) (Towers Watson, “Pension Freedom Index”, 2011)
3
The Need for Pension Reform in Ontario
Pension reform long overdue in Ontario and in many other Canadian jurisdictions
Societal/economic changes further reinforce need for pension reform
Pension stakeholders call for reforms to pension laws to save a “failing” system
4
Pension Reforms & Asymmetry of Risk
Key issue for employers related to “asymmetry of risk” (driven by issues over access to surplus in DB plans)
Important context in assessing reforms: (a) Pre-2008 context: access to surplus
predominant issueSurplus entitlementContribution holidays
(b) Trust law requirements as a result of Schmidt and subsequent jurisprudence
5
Background to Reforms: Schmidt Schmidt v. Air Products of Canada Ltd (SCC)
“The first step is to determine whether or not the pension fund is in fact a pension trust... A pension trust is a “classic” or “true” trust and not a mere trust for a purpose. If there is no trust created under the pension plan, the wording of the pension plan alone will govern the allocation of any surplus remaining on termination. However, if the fund is subject to a trust, different conclusions may govern.”
“When a pension fund is impressed with a trust, that trust is subject to all applicable trust laws.”
Consequences of Schmidt: Trust law analysis required in order to demonstrate
entitlement to surplus Application of trust law to pension trusts
6
Pension Reform in Ontario
OECP formed in November 2006 Public consultations held in October 2007 OECP final report in November 2008 Pension reform:
Bill 236 (Royal Assent on May 18, 2010) Bill 120 (Royal Assent on December 8, 2010) Bill 135 (Royal Assent on December 8, 2010) Bill 173 (Royal Assent on May 12, 2011) Bill 55 (first reading on March 27, 2012) Regulations to the PBA in conjunction with above-
mentioned reforms
Majority of reforms not yet in force7
Pension Reform: Surplus Withdrawal
Pre-Reform: Superintendent’s consent required
Ongoing plan: 100% member consent Wound up plan: lower member consent
requirement but requirement to demonstrate legal entitlement
Legal entitlement pursuant to Schmidt: (a) employer made a beneficiary to the trust from
the trust’s inception; or (b) employer expressly reserved the power to
revoke the trust at the trust’s inception; or (c) employer is entitled to the surplus by operation
of a “resulting trust”
8
Pension Reform: Surplus Withdrawal
Post-Reform: Surplus can now be paid pursuant to:
(a) consent regime or (b) court order
Consent regime:Employer must reach agreement with 2/3 of
plan members (or union) and % of former members/others determined by Superintendent
In force December 8, 2010
Reforms to permit arbitration re: surplus to follow
9
Pension Reform: Surplus Withdrawal
Impact of reforms from an employer’s perspective? No legislative override to trust law analysis
requirement Few plans currently with ongoing surplus –
new surplus sharing regime “too little, too late”
10
Pension Reform: Contribution Holidays
“Contribution holiday”: ability to use surplus to suspend/reduce normal cost contributions
Pre-Reform: No clear statutory guidance Schmidt: distinction between actuarial
surplus in ongoing plan and actual surplus on plan wind-up
Contribution holidays do not encroach on trust
Kerry: confirmed Schmidt approachEmployer entitled to take contribution holidays
unless plan documents preclude it
11
Pension Reform: Contribution Holidays
Post-Reform Employer/employee contributions can be
reduced/suspended if: (a) plan has a surplus (b) documents that create and support the
pension plan or pension fund do not prohibit it
(c) other prescribed requirements are met
Amendments not yet in force Falls short of legislative override to
requirement for trust law review
12
Pension Reform: Partial Wind-Ups
PWU either (i) voluntarily declared by employer, or (ii) ordered by the Superintendent
PWU by the Superintendent: Broad interpretation of power by the courts No time limitations
Two main issues: (a) Entitlement to surplus on PWU (b) “Grow-in” benefits
Reforms to eliminate PWUs (likely effective July 1, 2012)
13
Pension Reform: Partial Wind-Ups – Surplus Entitlement
Pre-Reform: Monsanto: SCC concludes that PBA requires
distribution of surplus attributable to PWUSCC did not make any conclusions with respect
to who was entitled to such surplusPWUs declared in 1980s and 1990s revisited –
distribution of surplus forced
Post-Reform: 2012 Ontario Budget – commitment to
eliminate PWUs by July 1, 2012 However: PWUs prior to July 1, 2012:
Monsanto will continue to apply14
Pension Reform: Partial Wind-Ups –Grow-In Benefits
Pre-Reform: Entitlement to grow-in benefits on PWU (or full wind
up) if age + service > 55 Increases the value of an employee’s pension and can
result in employee being entitled to enhanced early retirement benefits (where not otherwise eligible)
Post-Reform: Expansion of grow-in benefits to all terminations (other
than where wilful misconduct, disobedience or wilful neglect of duty that is not trivial nor condoned)
Expansion of grow-in benefits contrary to trends of encouraging later retirement and the reduction (or elimination) of grow-in benefits in other jurisdictions
15
Pension Reform: Asset Transfers, Plan Mergers & Plan Splits
Currently the PBA divides asset transfers into 2 categories: (a) asset transfer pursuant to the sale of
business (b) where assets are transferred to a new
pension plan
Superintendent consent required for asset transfer Can refuse asset transfer where transfer “does
not protect the pension benefits and any other benefits of the members and former members”
16
Pension Reform: Asset Transfers, Plan Mergers & Plan Splits
Transamerica Sale of business included reps and warranties
that a merged pension plan was fully funded Merged plan required to keep assets separate
and apart as condition of merger – one of predecessor plans underfunded
Court of Appeal: “exclusivity language” in trust of predecessor plan prevented trust funds from one part of the plan being used to meet obligations in the other part
FSCO response to Transamerica: Employer required to demonstrate no trust law
impediments to merger or asset transfer17
Pension Reform: Asset Transfers, Plan Mergers , and Plan Splits
Post-Reform: Aim of reforms to clarify rules Creation of “overarching” rules for all asset
transfers Removal of requirement for employers to
demonstrate that there are no trust law impediments?
18
Pension Reform: Plan Funding & Solvency
Pension plans required to be funded on: (a) “going concern basis” (b) “solvency basis”
FSCO 2011 Annual Report conclusions: 52% DB plans less than fully funded on
going concern basis; 88% less than fully funded on a solvency basis
Median solvency funded position of pension plans would “deteriorate significantly”
Demand by employers for solvency funding relief and for more funding flexibility
19
Pension Reform: Plan Funding and Solvency
Solutions? Letters of credit to fund solvency deficiencies
Potentially prohibitively expensive?Not yet in force
Temporary Solvency Funding ReliefThree solvency funding relief options for
valuation dates between September 30, 2008 and September 29, 2011
2012 Ontario Budget: commitment to extend temporary solvency funding relief
20
PRPPs: Background
Majority of employees in Ontario/Canada do not participate in employer sponsored retirement savings plans
Improvement of retirement security requires pension innovation
Pooled Registered Pension Plan (“PRPP”) to address fact that fewer Canadians have access to workplace pension
Intended to provide a new “low cost” and accessible retirement savings vehicle to those who do not currently participate in employer sponsored plans (i.e., self-employed and small-medium sized businesses)
21
PRPPs: Legislative Status
Federal Bill C-25 – November 17, 2011 Only applies to employers/employees in
“included employment” under federal PBSA Each province to pass own enabling
legislation
Draft legislative proposals to the Income Tax Act
22
PRPPs: Main Features
Bill C-25 as general rules – Regulations to provide additional details
PRPP to be a DC plan, administered by a licensed third party (as opposed to employer)
Licensing requirement for administrators Licenses to be extended to corporations,
regulated financial institutions and public pension plans?
23
PRPPs: Main Features
Responsibilities of Administrator Fiduciary duties and most responsibilities employers
have under RPPs
Responsibilities of Employer Employer participation voluntary Once elect to participate have limited responsibilities:
Select plan and enrol employees Contract with administrator Collect and remit contributions Provide administrator with information required to
comply with terms of plan
24
PRPPs: Main Features
Contributions Employers not required to contribute (but are entitled to) Rates of member contributions set by administrator Members may set contribution rates at 0% Employers may deduct member contributions (auto-
enrolment)
Tax Treatment Similar treatment to DC multi-employer pension plans Additional application of some RRSP rules Creation of separate category of plan known as “pooled
registered pension plan”
25
The Future of PRPPs in Canada? Will the provinces adopt PRPPs?
Ontario – pension innovation should be tied to CPP enhancements; has not embraced PRPPs
Quebec – mandatory VRSPs to be offered effective January 1, 2013
Will employees and employers embrace PRPPs? Need to facilitate participation by self-employed Financial institutions willingness/ability to sell
the concept
26
Target Benefit Plans: The Way of the Future?
Jury still out on PRPPs—can they provide the desired retirement income security?
Target benefit plans: aim to provide DB benefits but funded through fixed employer contributions If contributions not sufficient to provide
“target” DB benefits, accrued benefits can be reduced
TBP = “middle ground” between DB and DC plan models—the way forward?
27