Creating flexibility

Creating flexibility, 
Report on Business Magazine, October 2010 (Special Lexpert edition/insert on pensions & benefits)*
by Marzena Czarnecka

It may not revolutionize pension plans, but Bill C-9 introduces changes that include a distressed plan workout scheme and the elimination of certain investment constraints

Defined benefit plans are dying, and there’s nothing in the pensions component of the massive Bill C-9 – the Jobs and Economic Growth Act – that will save them.

“None of the proposed changes are going to bring new employers into defi ned benefit plans, nor will they solve the exodus from defined benefi t plans that we are seeing worldwide,” says Kathryn Bush, a partner with Blake, Cassels & Graydon LLP in Toronto.

But then, no one expected Bill C-9, tabled on March 29, 2010, to revolutionize the troubled landscape of pension plans. Although it includes amendments to the Income Tax Act and the Excise Act as well as the Pension Benefi ts Standards Act, C-9 chiefly targets federally regulated pension plans and closely follows the content of the consultation papers released in 2005 and 2009.

Proposed changes include the introduction of immediate vesting (i.e., immediate entitlement of all employees to a deferred pension upon termination), provision of variable benefits from defined contribution provisions to terminated and retired members, increased disclosure obligations, elimination of certain investment constraints, extension of circumstances under which letters of credit can be used to fund a plan, introduction of a distressed plan workout scheme, and the requirement of full funding upon plan termination. Additionally, all registered pension plans face new GST rules.

Notably, plan sponsors will not be able to claim GST input tax credits on most pension related expenses.

“Most of it was expected, and nothing is really new,” says Martin Rochette, a partner with Ogilvy Renault LLP in Montréal. “It’s not something that will make employers fall off their chairs.” Rochette is not even excited about the distressed pension workout scheme. “It’s something that’s already been used in the Canadian Press and Air Canada cases,” he says.

Still, if Bill C-9 passes as proposed, this change means companies dragged down by their pension plans will be able to restructure them without having to put the entire company into Companies’ Creditors Arrangement Act protection.

“I think this is great stuff ,” says Kenneth Burns, a partner with Lawson Lundell LLP in Vancouver. “Big pension obligations can cause companies to file for CCAA, and for them to have a mechanism in which they can put the pension plan into a workout scheme is a positive development.” Not one that, knock wood, will need to be used very often — but, says Burns, this is one really novel aspect of the amendments, and one he expects to see the provinces copy.

Less novel, but welcome by employers, actuaries and the “pensions community” is the elimination of, as Bush puts it, “outdated” investment constraints. Currently, pension plans cannot invest more than 25 per cent of their book value in real estate and not more than 5 per cent of their assets in a single parcel of real estate. The same restrictions apply to resource properties.

While of limited impact on smaller pension plan sponsors, these changes will make a considerable difference to the big players. “Th e community at large is happy to see more liberalization in this area,” says Burns.

Employers will also benefi t from the increased ability to use letters of credit to fund pension plans. On the flip side, they’ll have fewer contribution holidays, and they won’t be able to walk away from pension plans upon wind-up.

“That’s something employers may not view necessarily as positive, but it’s a good change for pension plans in general,” says Paul Forestell, an actuary and senior partner with Mercer LLC. Th e current legislation contains a loophole that allows solvent companies to walk away from pension plans when the company’s wound up. Not that employers have been doing this in droves — but it was “an oddity in legislation” that needed to be fixed, says Forestell.

There is also a slew of changes – Bill C-9 weighs in at some 1,000 pages – that may not particularly affect anyone one way or another, such as increasing the pension surplus threshold for employer contributions from 10 to 25 per cent. “Most employers don’t want to have excess money parked there anyway,” notes Bush. But, should they want to, now they can.

Other provisions are more onerous for plan sponsors.

“There’s probably more in the amendments for employees than for employers,” says Bush. From increased disclosure requirements through to immediate vesting on termination of employment, Bush characterizes the intent of the amendments – particularly those relating to the PBSA – as an attempt to make the registered pension plan system “more secure … in wake of such high-profi le failures as Nortel.”

A successful attempt? “Th e changes in C-9 are tinkering,” says Burns. “It’s for the most part good tinkering, but it really doesn’t get us to where we need to go. It actually adds cost to employers – through things like increased disclosure obligations or immediate vesting – rather than saving them money.”

Burns characterizes immediate vesting as a “bad idea,” which puts a considerable administrative burden on employers and yields a relatively minor benefit to short-term employees, but one that the federal government and the provinces appear to be adopting consistently. But there’s good news. “If immediate vesting in the short term is going to be a big hassle for you, you can do something to respond to the cost that has been downloaded on to you,” says Forestell. Options include amending pension plans to include a waiting period before new employees are eligible for the plan.

A change that’s, as Forestell puts it, “fairly easy to do.” It’s unlike saving old-style pension plans — something C-9 does not even pretend to attempt.

In line with the earlier discussion papers and reports such as the 2008 Ontario Expert Commission on Pensions Report, the best C-9 can do is “make existing plans as palatable as possible,” says Bush, who had been an advisor to the Ontario Expert Commission on Pensions.

Still, despite its unrevolutionary nature and increase in administrative and financial burdens on employers, the overall eff ect of C-9 on registered pension plans is likely to be positive. “In general, these amendments are good things to do for pension plans,” says Forestell. “They’ve introduced more flexibility into the legislation.”

And that’s a good thing. Even when it comes with a price tag, most of which will be borne by the plan sponsor — the employer.

Marzena Czarnecka is a Calgary-based freelance writer.