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Nova Scotia changes pension law

Employers must fund deficits before winding up defined benefit plans

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HALIFAX, Nova Scotia--Pension plan sponsors in Nova Scotia now must fully fund deficits when they terminate their pension plans, a change seen as another disincentive for employers to offer defined benefit plans.

The province, meanwhile, will follow Ontario, Alberta and British Columbia in reviewing its pension statute, which has not been substantially revised since 1988.

Earlier this month, Nova Scotia's Legislature amended the Pensions Benefits Act to require most employers that wind up their pension plans to make payments into the pension fund if funds are insufficient to pay for benefits. Multiemployer pension plans are exempt from the amended law.

Before the amendment, employers making partial or complete plan terminations were required to make contributions due only until the wind-up was implemented, meaning that employers with plan deficits were not required to fully fund them, sometimes resulting in plan members receiving reduced benefits.

The amendment does not affect funding of ongoing pension plans. Plan sponsors "are only affected if they decide to wind up the pension plan," said Nancy MacNeill Smith, superintendent of pensions for Nova Scotia.

The impetus for the change was a decision by Lake Oswego, Ore.-based Greenbrier Co. to close its Nova Scotia plant and wind up its plan, which was about 91% funded. The company stated that it had no obligation to fund the deficit under Nova Scotia's pension law.

The United Steelworkers union lobbied to amend the law to require full funding of plan deficits upon partial or full plan wind-ups. The amendment is retroactive to May 1 to capture the closure of the Greenbrier plant with the owner required to contribute roughly $2 million Canadian ($1.96 million) to fully fund the plan, Ms. MacNeill Smith said.

Greenbrier officials could not be reached for comment.

The amendment aligns Nova Scotia's pension statute with provinces such as Ontario, Alberta and British Columbia that already require employers to fully fund plan deficits upon termination.

Complying with the amendment, though, could be costly for Nova Scotia employers with generous early retirement provisions because of the "grow-in" provisions of the province's pension law, observers say. Grow-in rights entitle certain employees of wound-up plans to any early retirement benefits for which they would have been eligible had the plan and their employment continued.

Ontario and Nova Scotia currently are the only Canadian jurisdictions with grow-in rights.

"That's the first thing that's problematic for Nova Scotia employers," said Doug Brake, principal and actuary for Mercer L.L.C. in Halifax. "They're held to a higher standard than anyone else."

In 2004, Nova Scotia removed a requirement to prefund grow-in benefits to relieve financial stress on employers, but the recent amendment essentially reverses that change for employers winding up plans. "The employer would be required to fund the grow-in benefits as well," Ms. MacNeill Smith said.

Employers and consultants are concerned that the changes could accelerate the deterioration of defined benefit plan coverage in the province. The number of defined benefit plans with Nova Scotia members declined 20% from 1996 to 2005 while the number of defined contribution plans increased by 6.7%, according to the superintendent's annual report.

"For any company looking to set up shop in Nova Scotia that has a defined benefit plan, (the amended law) would certainly send a chill down a company's spine," said Leanne Hachey, vp, Atlantic Canada in Halifax, Nova Scotia, for the Canadian Federation of Independent Business, which represents more than 100,000 small to midsize employers across Canada.

Employers are unlikely to wind up pension plans in light of the amendment, although some may consider the option out of concern that their deficits will continue to grow and future wind-ups will be unaffordable, Mr. Brake said. "For private-sector employers, this will be one more burden that will cause them to rethink having a defined benefit plan," he said.

The amendment, meanwhile, was "premature" given that Nova Scotia recently announced a review of its pension legislation, Mr. Brake said. "I welcome the Nova Scotia review. I think it's well-timed," he said.

Model-law efforts continue

In addition, Toronto-based Canadian Assn. of Pension Supervisory Authorities, the coalition of federal and provincial pension regulators, continues to develop a model pension law to streamline pension regulation across Canada. "The potential is there and the timing is quite good in getting a lot of movement toward that commonality," Ms. MacNeill Smith said.

The process should be completed next year, although widespread disagreement still exists on pension issues such as grow-in rights that will be addressed during the provincial review, she said.