Target benefit plans continue to gain traction
Following the federal government’s proposed changes to the Pension Benefits Standards Act, 1985 (the “PBSA”) to permit federally-regulated employers to sponsor target benefit plans (“TBPs”), released in October 2016, TBPs continue to gain traction across multiple Canadian provinces. Federal Bill C-27, An Act to Amend the Pension Benefits Standards Act, 1985, has received first reading. See our post on the proposed changes here, and the key attributes of TBPs here. Since the federal government’s proposed changes were announced, governments in Manitoba, Nova Scotia and Saskatchewan have also considered TBPs. In addition, countries outside Canada, such as the U.K and Germany, have been considering similar design options.
In this post, we highlight some of these recent developments.
The Pension Commission of Manitoba recently released a consultation paper as a result of a statutorily required review of the Pension Benefits Act (Manitoba) and an initiative to update and strengthen the existing pension system. One of the Pension Commission’s recommendations included introducing either a target benefit or shared risk plan framework as another option in order to help encourage defined benefit-type plans. There are several discussion questions in the consultation paper related to this recommendation, including whether conversion to the new plan design should be permitted for existing benefits, or future accruals only, whether the new design should be available for single employer and multi-employer plans, and whether it should be restricted to unionized environments.
The Pension Commission’s report and the consultation paper refer to plan design reforms in other Canadian jurisdictions, such as target benefit reforms in Alberta and British Columbia and shared risk reforms in New Brunswick. Submissions in response to the consultation are due by February 21, 2018.
In Nova Scotia, the Finance and Treasury Board, Pension Regulation Division, released a review in the fall of 2017 called Pension Funding Framework Review and Other Issues Affecting Pension Plans (the “Nova Scotia Review”), following in the footsteps of other provinces that have already examined the funding framework for defined benefit pension plans. While the Nova Scotia Review focuses on funding, it also addresses certain other issues, including plan design, specifically TBPs. Nova Scotia’s pension legislation contains provisions that were introduced in 2015 for TBPs. These provisions have not yet been proclaimed into force. The Nova Scotia Review considers whether a TBP framework should be restricted to unionized environments and, in general, whether the province should develop a regulatory framework for TBPs.
Like the Manitoba consultation paper, the Nova Scotia Review refers to the reforms in New Brunswick, Alberta and British Columbia as provinces that have permitted TBPs to be established. The period for submission of feedback on the Nova Scotia Review is closed.
In the summer of 2017, Saskatchewan amended the Pension Benefits Regulations (Saskatchewan) to establish a new regulatory and funding regime for limited liability plans. The regulations define a limited liability plan as a defined benefit pension plan where the funding obligations are limited by a collective bargaining agreement or contract and where accrued and/or future benefits can be reduced if there is a funding deficit in the plan.
Saskatchewan’s pension regulator released an explanation of the amendments, which highlights features of the limited liability regime. Under the province’s limited liability regime:
- limited liability plans are permanently exempted from funding solvency deficiencies;
- a provision for adverse deviation must be funded on the current service cost;
- limited liability pension plan contracts can be amended to provide the option to calculate commuted values based on the plan’s going concern assumptions and to permanently decrease the commuted value to the plan’s funded position;
- transfer deficiency rules do not apply to the transfer out of a commuted value that is calculated under a limited liability plan based on the going concern assumptions of the plan;
- there are restrictions on increases to pensions in pay; and
- enhanced member communications are required.
Plan design changes are also on the radar screen in other countries. For example, Germany’s Federal Council recently adopted the German Occupational Pension Act (Betriebsrentenstärkungsgesetz) (“BSRG”), which came into force at the beginning of this year. The BSRG permits defined ambition pension plans, which are plans that allow for variation of benefit levels depending on the extent to which investment goals are met. Essentially, these plans offer defined pension goals but no guarantees, similar to TBPs.
In November 2017, the U.K. government launched an inquiry into defined ambition plans (or collective defined contribution). The inquiry considers the role that defined ambition plans could play in the UK pension landscape, benefits of the plan design to both employees and the general economy, and the legislative and regulatory framework that would be required to allow such plans. Responses to the inquiry closed at the end of January.
While we continue to see target benefits gain traction in some jurisdictions, the Netherlands appears braced to move away from defined benefit and target benefit type plans. It is expected that the government in the Netherlands will introduce reforms to move their system from a defined benefit type model to a defined contribution based system. However, there is no indication as to when draft rules can be expected.
Pension plan design options need to continue to evolve to adapt to changing workforces, demographics and other factors. We have seen pension reforms gain momentum to respond to these factors, including target benefit and shared risk reforms in certain jurisdictions in Canada and other pension reforms globally. As discussed above, in Canada, reforms to embrace new plan designs are under consideration in various jurisdictions. We will continue to keep you apprised of notable legislative changes regarding plan design.