Restructuring Pensions in Quebec’s Municipal Sector: Hints of Private Sector Reform to Come?

As was expected, the Quebec government recently tabled Bill 79, An Act to provide for the restructuring of and make other amendments to municipal defined benefit plans, which is aimed at improving the sustainability of defined benefit pension plans in the municipal sector.

This Bill is one of the steps that were announced in the government's action plan on pensions released last December (see our previous post).

While Bill 79 is not applicable to the private and university sectors, it should be remembered that the government is planning on introducing a second Bill this spring to create a framework for the restructuring process for private sector and university pension plans. One can reasonably expect that many features of the restructuring process for these plans will be fairly similar to those in the municipal sector.

If adopted, Bill 79 would impose a 50/50 cost-sharing arrangement between municipalities and their employees. A municipality’s share would thus be limited to 50% of the plan’s normal cost (but it would remain responsible for special payments unless the employees agree otherwise).

The Bill would eliminate the need to provide terminating employees in the municipal sector with the “additional pension benefit” provided for in section 60.1 of the Quebec Supplemental Pension Plans Act (i.e. a limited form of mandatory pre-retirement indexing). All municipal sector pension plans would also have to be amended to eliminate any subsidies for early retirement before the age of 55.

The Bill would also mandate the establishment of a provision for adverse deviation to be funded through a 20% increase in the plan’s normal cost. These contributions would be allocated to a stabilization fund. Such a reserve could be used to fund future indexation of pensions, to the extent that the reserve remains sufficient to protect the plan against the risk of adverse deviations.

In addition, the Bill provides that two situations would trigger an obligation for municipalities and their employees to restructure the defined benefits under their plan:

  • a funded status below 85% on December 31, 2013; or
  • the plan offers early retirement subsidies before the age of 55.

A restructuring process could also be initiated at the request of the parties on a voluntary basis.

The objective is essentially to force the parties to a pension plan to negotiate measures (including reductions in benefits) that are necessary to improve the sustainability of their plan in the long run.

The restructuring process would consist of three phases. First, the representatives of the municipality and the employees would meet and negotiate the measures that would have to be implemented. Should the parties fail to agree on a set of measures, the matter would be referred to a mediator and the parties would have another 6 months to reach an agreement. If the parties still cannot agree on certain measures after the mediation, then the matter would go to arbitration before the Quebec Labour Relations Board. The decision of the Board would be binding and the plan would have to be amended accordingly.

During the negotiations, the parties could agree to modify or eliminate ancillary benefits for active members, including indexation, bridge benefits and early retirement subsidies.

The indexation of pensions in payment could be suspended for a period of time or the indexation formula could be amended. However, if a subsequent actuarial valuation establishes the existence of a surplus, such surplus would have to be used in priority to restore the indexation of those pensions.

With an election in the works, it is likely that the adoption of Bill 79 (and any similar Bills applicable to the private sector and/or universities) will be delayed by a few months and that they may still undergo material changes before their adoption.