Federal Pension Reform Proposals.

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Pension & Employee Benefits, October 2009

The proposed changes are aimed at federally regulated private pension plans governed by the Pension Benefits Standards Act, 1985 (the Act), with one exception noted.

1. Increased Minimum Standards Plan sponsors will be required to fully fund pension benefits on plan termination. Any solvency deficit that exists at the time of termination will be required to be amortized in equal payments over no more than five years.

Contribution holidays will only be permitted if the pension plan is more than fully funded by a 5% solvency margin. Annual valuations will be required for pension plans in surplus.

Amendments to a plan that has, or would have, a solvency ratio of 0.85 or less will be voided.

Sponsor-declared partial terminations will be eliminated from the Act.

There will be immediate vesting of benefits.

Disclosure requirements will be enhanced. The information that must be provided in annual member statements, and the type of other information statements, will be expanded. Electronic provision of disclosure requirements will be permitted on a positive consent basis.

2. Funding Changes The government will introduce a new standard for establishing minimum funding requirements on a solvency basis that will use average - rather than current - solvency ratios to determine minimum funding requirements.

Sponsors will be permitted to use properly structured letters of credit to satisfy solvency payments up to a limit of 15% of plan assets.

The 10% pension surplus threshold in the Income Tax Act for permitted tax sheltering will be increased to 25%. This applies to both federally and provincially regulated defined benefit plans.

3. Insolvencies

A workout scheme for distressed pension plans (including eligibility for a short moratorium on special payments) will be established to help facilitate the resolution of plan-specific problems that arise in some circumstances when a particular plan sponsor cannot meet near-term funding requirements.

4. Defined contribution pension plans and negotiated contribution defined benefit plans Provisions of the Act and the Regulations will be revised to provide clarity on the responsibilities and accountabilities of the parties involved with defined contribution plans, including the elimination of the requirement for a Statement of Investment Policy and Procedures for a defined contribution plan that provides investment option to its members.

Pension plans will have the option to permit members to receive Life Income Fund style retirement benefit payments directly from a defined contribution pension fund.

The framework respecting negotiated contribution defined benefit plans, which are common in multiemployer pension plan arrangements, will be improved.

5. Investment Rules The present pension fund investment framework, which imposes a prudent person standard supplemented with quantitative investment limits, will be amended as follows:

Remove the quantitative limits in respect of resource and real property investments.

Amend the 10% concentration limit to limit pension funds to investing a maximum of 10% of the market value of assets of the pension fund (rather than the book value) in any one entity. An exception to this rule will exist for pooled investments over which the employer does not exercise direct control, such as mutual fund investments.

Prohibit direct self investment (e.g., an employer would no longer be permitted to invest any amount of its pension fund in its own debt or shares).

6. Other Changes The benefits of members who cannot be located will be permitted to be transferred to a central repository.

The Office of the Superintendent of Financial Institutions will be given additional powers to intervene when there are concerns about the work of a plan's actuary.

A number of other technical improvements to the Act and the Regulations will be made to align the framework more explicitly with what is seen to be the common interpretation and administration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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