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Canadian provinces not expected to fully adopt model pension law

Pension plan sponsors in Canada need fiduciary protection: Expert

Searching for sustainability

Defined contribution plans see gains in popularity

340 attend Canadian conference

Canadian provinces not expected to fully adopt model pension law

Local jurisdictions want to keep control of own regulations


Published Sept. 24, 2007

CHARLOTTETOWN, Prince Edward Island—Canada is moving toward adoption of a model pension law, although some of its most controversial principles are not likely to be implemented, Nova Scotia's pension regulator says.

The Canadian Assn. of Pension Supervisory Authorities' model law provides the basis for all jurisdictions to revise their pension legislation and simplify regulation of plans in multiple jurisdictions, said Nancy MacNeill Smith, superintendent of pensions for Nova Scotia and a member of Toronto-based CAPSA, the coalition of federal and provincial pension regulators.

"It's not a promise of complete harmonization, but given the nature of the Constitution of Canada and the powers of the governments, it is what we've found to be the most workable solution," she said during a session at the Assn. of Canadian Pension Management's annual conference held Sept. 10-13 in Charlottetown, Prince Edward Island.

CAPSA likely will finalize the model pension law next year and then present the principles to provincial legislatures in the hope of incorporating the principles into each pension statute, Ms. Smith said.

Manitoba has already adopted some of the CAPSA model law principles. Ontario is reviewing its pension law; Alberta, British Columbia and possibly Nova Scotia will begin similar reviews with the goal of adopting, to the greatest extent possible, common pension standards she said.

A consensus, though, on some of the most contentious issues in the pension industry—namely surplus ownership—has failed to emerge, Ms. Smith said.

Indeed, provincial governments have divergent views on a number of issues, including unlocking pension benefits, or allowing the employee to withdraw funds from the pension. Saskatchewan passed legislation a few years ago to allow residents to unlock part of their pension benefits. Nova Scotia, though, would resist allowing residents to unlock their pension benefits, out of concern that its relatively older population would not be able to replenish their retirement savings, she said.

"I don't believe it will ever be possible to have a single uniform law in Canada because…it's very important to the jurisdictions to be able to maintain control of the laws they set for the people in their province," Ms. Smith said.

Ideally, Canada also would have a national pension regulator to oversee pension plans that have members in more than one province, she said. There are currently 2,700 multijurisdictional pension plans providing benefits to 1.5 million Canadian residents.

The regulators developed a memorandum of reciprocal agreement in 1968 to reduce administrative and regulatory costs associated with plans in multiple jurisdictions. Under the memorandum, the plans were subject to the rules of each jurisdiction in which they have plan members, but the regulator of the jurisdiction where the plan was registered would apply all applicable regulations, including those of other provinces. For example, if a pension plan were registered in Nova Scotia but also had members in Ontario, Nova Scotia's regulator would apply the pension rules of both provinces in overseeing the plan.

The problem, though, is that legislation across Canada is no longer similar, making it impossible for a regulator to enforce both its and other jurisdictions' rules, she said.

In response, CAPSA is nearing completion of a revised memorandum with clear and explicit rules regarding applicable laws. For example, if a member works in Ontario, then Ontario's rules would govern the member's benefits even if the plan was registered in Alberta. The Alberta pension statute, though, would govern the operation of the plan itself because that is where the plan is registered.

This practice has been accepted by regulators as it results in a minimal loss of authority. In contrast, the creation of a national pension regulator would result in a substantial loss of control for the provinces.

"It's really not acceptable," to the governments, Ms. Smith said.

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Pension plan sponsors in Canada need fiduciary protection: Expert

U.S.-style shield would help efforts to educate workers


Published Sept. 24, 2007

CHARLOTTETOWN, Prince Edward Island—Canadian pension plan sponsors want to aid members' retirement preparation, but they also want a legal shield similar to a relatively new law that protects U.S. sponsors, a consultant says.

Such a law could spur automatic enrollment in defined contribution plans and result in more advice to Canadian plan members on investment strategies, experts told the Assn. of Canadian Pension Management at its annual conference held Sept. 10-13 in Charlottetown, Prince Edward Island.

The Pension Protection Act of 2006 gave plan sponsors in the United States fiduciary relief in implementing automatic enrollment or automatic escalation provisions in their defined contribution plans, said Matthew Smith, managing director of Russell Retirement Services for Tacoma, Wash.-based Russell Investment Group.

A Hewitt Associates Inc. study shows more than two-thirds of 401(k) plans in the United States likely will have automatic enrollment by the end of this year, but the trend is unlikely to gain similar traction in Canada because there is no equivalent legislation to the PPA, said Zaheed Jiwani, head of DC investment consulting for Hewitt in Toronto.

Although Canadian sponsors want to help members better prepare for retirement, they "want some of the legal protections" available to their U.S counterparts, he said.

The PPA also encourages U.S. plan sponsors to implement automatic escalation provisions—or those that automatically increase the percentage of employee pay placed into a 401(k) as years of service increase. However, there is no legislation that would allow Canadian plan sponsors to utilize such a feature, Mr. Jiwani said.

In addition, maximum contribution levels are "significantly lower" in Canada than they are in the United States, which make automatic escalation provisions less beneficial to Canadian plan members, he said.

Canadian plan sponsors are adopting target-date funds, a rapidly escalating trend in the United States, he said. Currently, 57% of U.S. plan sponsors offer target-date funds—mutual funds that automatically shift toward a more conservative mix of investments as they approach a particular date—and that number will likely reach about 80% in 2008, according to the Hewitt study.

About 19% of Canadian sponsors of defined contribution plans now offer target-date funds, according to Hewitt. "We are seeing it trend upward and I suspect we'll see the number shoot through the roof over the next few years," Mr. Jiwani said.

Plan members want investment advice, something that Canadian plan sponsors have been reluctant to provide with less than one-third offering investment advice in any form, according to the Hewitt study.

"Members need guidance," Mr. Jiwani said. "They need some advice. Some members don't even know the difference between an equity and a bond."

The PPA allows U.S. plan sponsors to provide a fiduciary adviser, but Canadian plan sponsors lack the same legal protection, he said. "A lot of plan sponsors want to offer advice, but they also want that reassurance."

Canada's capital accumulation plan guidelines, which govern the rights and responsibilities of plan sponsors, merely say that a plan sponsor may choose to offer advice or provide the name of an adviser. If a sponsor does offer an adviser, it is the sponsor's responsibility to select and monitor the adviser, a "confusing" prospect for plan sponsors, Mr. Jiwani said.

The cost associated with offering advice to plan members is another uncertain issue. "The reality is members want plan sponsors to pay and plan sponsors usually want the members to pay," Mr. Jiwani said. "Until we figure out how that's going to work…we don't see this trend taking off."

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Searching for sustainability

Real problems with DB plans need to be addressed, experts say


Published Sept. 24, 2007

CHARLOTTETOWN, Prince Edward Island—Major change to the regulatory regime governing Canadian pension plans is critical to creating a sustainable environment for defined benefit plans, industry experts say.

Although the federal government and several provinces have enacted temporary or limited funding relief measures, the actions do not address the real problems with defined benefit plans, said Jill Wagman, a principal with consulting firm Eckler Ltd in Toronto. Those issues include asymmetry of pension surplus/deficit ownership, in which sponsors are responsible for paying off deficits but may not be entitled to plan surpluses, she said.

“We need to cry out for massive regulatory change,” Ms. Wagman said during the Assn. of Canadian Pension Management’s annual conference Sept. 10-13 in Charlottetown, Prince Edward Island.

The lack of clarity on surplus ownership is a major impediment to the sustainability of defined benefit plans, said Etienne Brodeur, senior director, compensation, pension and benefits for Montreal-based Bombardier Inc., which makes jets, railcars and recreational equipment. “Defined benefit plans are in totally boiling water,” he said. “No one would jump into that water.”

The Ontario Expert Commission on Pensions is in the midst of a major review of the Ontario Pensions Benefits Act including the surplus ownership issue, Ms. Wagman said. “Ontario is headed in the right direction.”

The harmonization of pension laws and regulations would improve the environment for defined benefit plans, but such harmonization may require a constitutional amendment, given that each province has the authority to regulate pensions within its own borders. “Clarification of the legal environment would help a lot,” Mr. Brodeur said. “Looking at it from the outside, it’s hopeless.”

Changing the regulatory system, even if it makes it easier for sponsors to run defined benefit plans, will not address the economic environment that makes it difficult to offer the plans, said Hugh Mackenzie, an economist and principal with Hugh Mackenzie & Associates in Toronto.

The pension industry should establish an alternative for employers and employees that optimizes risk pooling, net investment return and administrative overhead, he said. The alternative he envisions would resemble the Canada Pension Plan—the government social insurance program—because the CPP is an efficient provider of defined benefits, he said.

Mr. Mackenzie asked: “Why not clone the CPP as a conventionally funded DB plan?”

The structure of defined benefit plans needs to change to make them more sustainable, Ms. Wagman said. The benefit plan of the future is neither a defined benefit nor defined contribution plan, but a combination that provides for risk sharing between the member and the plan sponsor, balances benefit security with sustainability and provides a reasonable level of cost stability, she said. Examples of such plans include multiemployer plans, hybrid plans and jointly funded plans.

“Defined benefit plans themselves have structural issues that we need to re-examine,” Ms. Wagman said.

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Defined contribution plans see gains in popularity

Risks include inaction by members, possible litigation


Published Sept. 24, 2007

CHARLOTTETOWN, Prince Edward Island—Defined contribution pension plans are gaining popularity among Canadian plan sponsors, but they have their own inherent risks that employers must address, plan sponsors say.

Among the risks associated with defined contribution plans are inaction by plan members that could result in an inadequate retirement income and possible litigation related to low investment returns, plan sponsors said during the Assn. of Canadian Pension Management’s annual conference Sept. 10-13 in Charlottetown, Prince Edward Island.

Financial market volatility and the impact that has on the ability of defined benefit plan sponsors to fix their pension contributions is the impetus for the movement toward defined contribution plans, observers say.

Canadian National Railway Co., for example, contributes about $100 million per year to its defined benefit plans, which are about 100% funded, said Jay Mann, senior adviser, pensions and benefits for the Montreal-based company. Projections have shown, though, that its defined benefit plans’ funding levels could easily fall to 90%, which could force the company to contribute four times that amount to keep the plans fully funded, he said.

While the vast majority of CN employees remain in defined benefit plans, the company last year switched to a defined contribution plan for management and new hires, Mr. Mann said. “It’s not just a passing trend,” he said of companies switching to the defined contribution plans.

Defined contribution plans, though, have significant regulatory and legal risks, said Robert Landry, chief counsel, labor relations and human resources governance for Aurora, Ontario-based Magna International Inc., which has most of its employees in defined contribution plans.

Guidelines for capital accumulation plans—the majority of which are defined contribution plans—that govern the rights and responsibilities of plan sponsors became effective on Dec. 31, 2005 (BI, Dec. 19, 2005).

Although the CAP guidelines provided some clarity for managing defined contribution plans, they still carry substantial risks—namely the potential for an inadequate return on plan assets and the level of advice given to employees responsible for directing their pension investments, he said.

“There is a significant risk in DC that cannot be underestimated,” Mr. Landry said.

Defined benefit plans, though, also have litigation risks that include potential shareholder lawsuits challenging the management of company pension plans and the costs involved with providing the benefit, Mr. Mann said.

“I believe the risks under a DB plan would most likely end up costing a company more than a DC plan,” Mr. Mann said.

Plan sponsors can take steps to mitigate the risks in defined contribution plans, including providing employees with retirement planning information, Mr. Mann said. “If you want to mitigate your legal risk down the road, (educating employees) is something you should do,” he said.

While CAP guidelines do not require member education, plan sponsors should educate their employees, said Shirley McIntyre, director of pensions for Calgary, Alberta-based TransAlta Corp., which introduced a DC plan in 1997. “I don’t know if we should be responsible for it,” she said. “I think we should do it.”

Even when employers try to educate their employees on properly planning for retirement, they often find that employees do not attend information seminars, do not read the investment materials they are sent and do not take action to manage their pension funds, Ms. McIntyre said.

“We know what we should do and we’re doing it, but it isn’t working,” Ms McIntyre said.

In response, plan sponsors can mandate attendance at information sessions, invite spouses to attend, test their employees’ knowledge of retirement issues and reward attendance, she said.

Employers can also introduce better default options to counter the inaction of their employees, plan sponsors say.

Life cycle or target-date funds—mutual funds that automatically shift to a more conservative mix of investments as they approach a particular date—are the most appropriate default fund because “plan members are prone to keep doing whatever they’re doing today unless some external force is presented to them,” Mr. Landry said.

Pension plans have often utilized money market funds—mutual funds that are required by law to invest in low-risk securities—as their default options, but these funds will not meet the objective of providing adequate retirement income, he said. Magna’s default option is now a life cycle fund because of its employees’ tendency to remain in the default option, Mr. Landry said.

CN’s benefits staff is attempting to change the default option from a money market to a lifestyle fund because of data that showed that 40% of its employees remain in the default option.

“That’s just not acceptable,” Mr. Mann said. “The downside to doing this is that employees become even more passive.”

Plan sponsors also should limit investment choices in their defined contribution plans because if employees have too many options, they will default to what they consider to be the safest choice such as a money market fund, Mr. Landry said. But there is “no magical number” on how many options to offer to employees, he said.

Limiting investment choices, though, is not always in the best interest of plan members, particularly in the current workplace in which people frequently change jobs, Ms. McIntyre said.

If employees are only given one or two choices, they may be unable to manage the funds on their own if they leave the company, she said. “At some point, we have to stop looking after people,” Ms. McIntyre said.

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340 attend Canadian conference


Published Sept. 24, 2007

CHARLOTTETOWN, Prince Edward Island—About 340 plan sponsors, administrators and service providers attended the Assn. of Canadian Pension Management's 31st annual conference Sept. 10-13 in Charlottetown, Prince Edward Island.

The conference featured sessions on the sustainability of defined benefit plans, the risks associated with defined contribution plans and the need for reform of Canada's pension regulation system.

Next year's conference will be held Sept. 16-19 in Lake Louise, Alberta.

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