Key Takeaways from the 2023 Pension & Benefits Seminar
On November 29, 2023, pension experts at McCarthy Tétrault came together to host the firm’s 13th Annual Pension & Benefits Seminar. This annual client-focused event canvasses legal and governance insights as well as key trends in the pensions and benefits industry.
This article highlights the key takeaways from the seminar.
Takeaway #1: Legislative and Regulatory Updates
This has been a busy year for both legislative and regulatory updates affecting Canadian retirement plans.
Positive Updates in 2023 for Plan Sponsors and Administrators
- Canadian defined benefit pension plans (“DB Plans”) are well funded. According to Ontario's Financial Services Regulatory Authority’s (“FSRA”) Q3 2023 Solvency Report, 85% of Ontario plans are projected to be fully funded on a solvency basis with the median solvency ratio for the quarter reaching 117% – a historic peak. The story is generally the same for DB Plans registered in other Canadian jurisdictions. As funding surpluses build, plan sponsors are presented with opportunities to transfer risk through annuity purchases, offer benefit increases and implement other changes or initiatives that would not have been achievable when funding ratios were well under 100%.
- Amendments have been proposed to the rules under the Income Tax Act for retirement compensation arrangements (“RCAs”). Under the proposed amendments, RCAs would no longer be required to pay refundable tax on fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond). These changes will only apply to RCAs that are supplemental to registered pension plans. In addition, employers will also be allowed to request refunds of previously remitted refundable taxes in respect of fees or premiums paid for letters of credit (or surety bonds) by RCA trusts. These proposed reforms are welcome changes that will benefit employers who use letters of credit or surety bonds to secure their supplemental retirement plan commitments to their employees instead of funding them by setting funds aside or through regular contributions.
- Income Tax Act and Regulations amendments that assist pension plan administrators in correcting defined contribution plan (“DC Plan”) errors received Royal Asset on June 22, 2023. These amendments will greatly assist in reducing the red tape and expense associated with correcting both under and over-contribution errors that often occur in the day-to-day administration of DC Plans.
Fall Economic Statement 2023: Pension Funds and Domestic Investment
The Deputy Prime Minister and Minister of Finance tabled the 2023 Fall Economic Statement (“FES”) on November 21, 2023. The FES identifies that $3 trillion of assets have accumulated in Canadian pension funds and, in a measure that echoes discussions occurring in other jurisdictions, proposes to try to leverage some portion of those assets to increase domestic investment. Specifically, the FES proposes that the Government will: (i) reach out to Canadian pension funds and work collaboratively to create an environment that “encourages and identifies more opportunities” for investment domestically; (ii) explore the removal of the so-called “30% Rule” vis-à-vis domestic investment by these pension funds; and (iii) impose new disclosure obligations on large federally regulated pension funds that will require them to identify to the Office of the Superintendent of Financial Institutions the distribution of their investments by jurisdiction and asset-type. This information would be made publicly available. The Government will also discuss with the provinces similar disclosure requirements for large provincially regulated pension plans.
Bill C-228: Pension Protection Act
Perhaps the most significant legislative change that came into force in 2023 affecting employers sponsoring DB Plans was Bill C-228, the Pension Protection Act. On April 27, 2023, federal Bill C-228 received Royal Assent and is now law. As a result, DB Plan deficits will now be required to be paid in priority to most other creditors, including secured creditors, during bankruptcy and insolvency proceedings. The new priority for DB Plans deficits applies not only to pension plans registered under the federal Pension Benefits Standards Act, 1985, but also to pension plans registered in other jurisdictions. There is however a four-year transition period for existing pension plans (and their sponsors); the new pension priority will not take effect until April 27, 2027. Any new DB Plans registered by employers who currently have no DB Plans will be subject to the pension priority rules immediately. Bill C-228 may trigger negative and unintended consequences for DB Plan sponsors, such as:
- Increased cost of borrowing;
- Inability to borrow;
- Pension funding deficits possibly included as an event of default in lending agreements;
- Pressure to increase valuation frequency and keep the plan fully funded; and
- Pressure to terminate DB pension plans or transfer DB liabilities via annuity purchase
CAPSA Release of Revised or New Guidelines
The Canadian Association of Pension Supervisory Authorities (“CAPSA”) has continued to issue draft guidelines for industry comment. Included in these releases is an updated draft of CAPSA Guideline No. 3 – Capital Accumulation Plans (“CAP Guideline”) and a new draft CAPSA Guideline: Pension Plan Risk Management (“Risk Guideline”). The changes to the revised CAP Guideline focus on the regulators’ views on matters such as fiduciary duties owed by CAP administrators and (surprisingly for the industry) plan sponsors; the importance of aiming to achieve “value for money” when making administration and investment decisions; the decumulation of CAP assets; the clarification of the rights and responsibilities of CAP sponsors versus service providers; and the definition of the term “CAP”. The submission deadline was July 21, 2023.
Following consultations in 2022 and more recently in 2023, CAPSA developed a new Risk Guideline, which addresses among other things, third-party/outsourcing risk; cyber security risk; ESG issues; use of leverage; and investment risk governance. The submission deadline to comment on the guideline was September 30, 2023. CAPSA has indicated that the purpose of the draft Risk Guideline is to provide a framework that can be used by pension plan administrators to evaluate and prioritize risks facing the plan while still allowing flexibility to implement measures that reflect a plan’s particular circumstances.
Québec “La Belle Province” and Federal Bill C-13
Bill C-13, An Act to amend the Official Languages Act, to enact the Use of French in Federally Regulated Private Businesses Act and to make related amendments to other Acts (hereinafter, referred to as the “Bill”) received royal assent on June 20, 2023. The Canadian government’s push to adopt Bill C-13 followed the Québec National Assembly’s adoption of Bill 96, which ushered in significant amendments to the Charter of the French Language, impacting, among other things, the rights of employees in Québec workplaces. In this regard, Bill C-13 provides that federally regulated employees working in Québec and, eventually, in “a region of Canada with a strong francophone presence”, with the express right to work in French. The Act is supposed to come into force on a day to be fixed by order of the Governor in Council.
FSRA Guidelines and Enforcement Action
FSRA has released a proposed update to its “Pension Plan Administrator Roles and Responsibilities Guidance”. The update clarifies FSRA’s expectations regarding administrator duties and includes new sections addressing: (i) the management and retention of plan records, (ii) responding to complaints and inquiries in a manner that is accessible, fair, timely and effective, and (iii) communicating information to members in an accurate, clear and timely manner. The revised Guideline also includes a clear statement that it reflects FSRA’s view on administration legal requirements under the Pension Benefits Act (Ontario) (“PBA”) and that non-compliance can lead to enforcement action or supervisory action against the plan administrator.
FSRA recently also released its second consultation related to pension plan amendments. The revised Proposed Guidance on Pension Plan Amendments provides further details on FSRA’s approach to retroactive plan amendments. In this regard, the Proposed Guidance elaborates on the following:
- When a plan amendment would be considered a retroactive adverse amendment;
- FSRA’s approach to evaluating and exercising its discretion to register an amendment with retroactive and potentially negative impacts;
- FSRA’s views on replacing a variable indexation formula with a fixed rate;
- Notice requirements for prospective adverse amendments;
- FSRA’s views on its authority to issue a Notice of Intended Decision to refuse to register an amendment to a plan; and
- Potential penalties for an administrator that fails to comply with the applicable requirements.
Comments on the revised Proposed Guidance are due by January 19, 2024.
In addition, FSRA is also ramping up its imposition of administrative monetary penalties (“AMPs”) for non-compliance with the PBA. As a reminder, there are two types of AMPs that FSRA can impose: general and summary. A general AMP may be imposed when a person contravenes specific requirements of the PBA or its regulations, they fail to comply with an order imposed by FSRA or they fail to comply with an obligation assumed by way of an undertaking. FSRA has indicated that these contraventions typically come to its attention through a complaint, a plan examination, a targeted review or a general desk review conducted by FSRA. A summary AMP may be imposed if a person is late in submitting their regulatory filings. The late filing can be identified by FSRA through its Pension Data System. At the end of 2022, FSRA imposed its first round of summary AMPs, all relating to filings that were overdue. FSRA has the power to impose significant penalties: up to a maximum of $10,000 for an individual and $25,000 for other entities.
Takeaway #2: Stay attuned to emerging trends in pension disputes and formulate comprehensive strategies to adeptly navigate them
Within the framework of the PBA, administrators of pension plans shoulder fiduciary responsibilities entailing a commitment to loyalty, good faith, and acting in the best interests of plan members. This requires administrators to ensure plan members are treated fairly and that benefit disbursements align with the PBA and other applicable legislation. Periodically, breaches of fiduciary duty arise from administrative oversights or errors, sparking pension disputes upon their discovery.
Small Pension Disputes and Strategies
Often, resolving pension disputes requires plan administrators to seek alternatives to litigation, given its substantial costs. While the litigation route remains available, administrators should be informed of the more cost-effective alternatives available. To this end, engaging legal counsel is typically a good first strategic step. Administrators may also choose to enlist the expertise of actuaries or alternative consultants to evaluate the extent of the alleged errors and their associated risks. This approach is often a more economical alternative to legal proceedings because it allows for a more efficient allocation of resources, preventing unnecessary expenditures on addressing issues beyond the actual scope of the dispute. When using actuaries outside of litigation, administrators should recognize the potential lack of privilege in these conversations, which may necessitate administrators to divulge their contents later on. Navigating this intricate landscape requires administrators to carefully balance the pursuit of resolution with the challenges and costs similarly involved.
Class Action Pension Disputes and Strategies
Sometimes seemingly small disputes can evolve into big disputes. In the intricate landscape of pension plan management, scenarios can unfold where a single member's complaint gains momentum among peers, or whereby complainants seek out regulator involvement. In these instances, the potential for class action proceedings often looms large, presenting challenges and opportunities for both plaintiffs and administrators.
Class actions, commonly hailed as potent tools for conclusive resolutions, not only serve the interests of plaintiffs but can also be advantageous for administrators seeking comprehensive solutions that are binding on the affected group of persons, leading to a release of liability for the administrator. Yet, navigating the complexities of litigation is fraught with uncertainties, both in cost and outcomes. In this context, a collaborative approach emerges as a favoured strategy, emphasizing engagement with affected members, and consultation with actuaries once more, to explore compensation options. Proactive engagement with affected parties, such as plan members and beneficiaries, can be very effective as openly communicating and involving these stakeholders can foster transparency and build trust.
Furthermore, within the context of a class action dispute, maintaining transparent communication with regulators typically proves to be a cost-effective tactic that can also expedite the dispute resolution process. Involving the regulator can influence creative solutions between administrators and affected members since the regulator can provide guidance on navigating legal requirements and enhance the credibility of the resolution process.
Finally, recognizing the multifaceted challenges faced by pension plan trustees and administrators with class action disputes, key factors underscore the importance of maintaining adequate liability insurance, understanding PBA requirements, and sound investment decision-making. Together, these measures form the foundation of effective governance, robust risk management, and ensuring adherence to regulatory standards in pension plan management.
Takeaway #3: Acquire a deep understanding of the pivotal aspects of beneficiary designations, including the evolving landscape of artificial intelligence
Beneficiary Designation and Pension Plans
Beneficiary designation laws and requirements differ from province to province. It is possible to name several beneficiaries, including primary and contingent beneficiaries, under the common law and civil law. In all instances, it is advisable to keep a written record of the chronology of the designation in order to avoid disputes. In the case of electronic beneficiary designations, there are three essential requirements: (i) ensure that the provincial legislation in question permits such designations, (ii) the signature is valid, and (iii) it remains possible for the signatory to provide a wet signature if preferred.
Spouse Rights and Beneficiary Designations
Under applicable pension legislation, spouses have a “super-priority” to receive pre-retirement and post-retirement death benefits payable under a pension plan. However, additionally members of registered pension plans also have the ability to select both primary and contingent beneficiaries if no spouse exists at the time of death or the deceased member’s spouse has waived their right to death benefits payable under the plan. To avoid potential issues arising after the member’s death, it is recommended that the chronology of beneficiary designations be preserved and that the designation forms assigned by the plan administrator be used to designate the beneficiaries.
Minor Beneficiary Designation
In provinces other than Québec, until a minor is of the age of majority, money cannot be paid directly to a minor and must either be paid to an appointed trustee, or if there is no appointed trustee, into court. An exception is found under the Ontario Children’s Law Reform Act, where if the amount is under $35,000, it can be paid to the minor’s parent or legal guardian. However, this may be contentious in circumstances of martial breakdown.
Under the Québec Civil Law, money can be paid directly to the minor’s parents since they are, by law, the minor’s legal guardian and they have parental authority until the minor reaches age 18 or is judicially emancipated.
Many pension plan administrators are striving to understand the potential impacts and opportunities of AI and machine learning on plan administration. One thing is clear: AI is here to stay and is making a splash in the pension world. Plan administrators are presented with unique challenges and opportunities to utilize AI technologies to enhance plan administration and benefit outcomes.
The unique opportunities and related risk management strategies required for Plan administrators and their advisors in the AI context include the following:
- The bigger the system, the greater the risk. It is important to monitor AI driven administration and investment management systems to ensure risk can be mitigated.
- Be aware of overreliance on AI outputs. Test, test and test again.
- Be aware of potential biases and data manipulation.
- Get ahead of the risk to manage potential liability. Negotiate appropriate contract terms with third-party providers such as disclosure obligations, standard of care and limitation of liability provisions..
Key Opportunities AI Could Provide in Pension Administration
- Assistance with the collection and analysis of large volumes of member data and forecasting patterns and trends.
- Improve member education and information with respect to their plan enrolment and understanding of plan terms with the support of an online chat box for efficiency.
- Improve investment strategies and outcomes through employing measures such as the use of algorithmic programs allowing investment managers to track economic indicators and adjust portfolios automatically in response.
- Assistance in the selection and monitoring of portfolio managers.
With the advancement of technology, AI is evolving to be a new tool in the toolbox for plan administrators to increase the effectiveness of their benefit delivery and overall member experience while reducing administration costs.
Takeaway #4: Familiarize oneself with the potential drawbacks of pension plan surpluses and grasp the impacts posed by inflation
Coping with newfound Inflation and DB Plan Surplus
It seems as though we’ve been patiently expecting rising interest rates for the last 10-15 years but now that they are here, we are uncertain how to react. The historically low interest rates, that caused DB Plan liabilities and plan contribution levels to increase every time the Bank of Canada dropped overnight lending rates, have been headed for some time now in the other direction. As inflation increased following the initial COVID crisis, like other central banks in much of the world, the Bank of Canada increased rates frequently and sharply. Recently, the dramatic trend to higher rates has slowed and recent comments from Tiff Macklem, the present governor of the Bank of Canada, give optimism to a time when the rate increases are a thing of the past and rates may even decrease if inflation targets look to be reachable again. Nonetheless, currently, we have higher interest rates and higher inflation.
Combine rising interest rates, with financial markets that are still relatively strong and more and more DB plans are enjoying better funded positions and may even find themselves, dare we say it, in a surplus position! The problem is, that after two decades of special payments, many plan sponsors and administrators may not perceive that there is a meaningful way to employ the surplus assets, except perhaps as a funding buffer in the event of a subsequent economic downturn. This is an unenviable position to be in.
Instead, let’s look to the past to address the problems of the future. For example, we know that in past economic slowdowns DC Plan members have refrained from retiring and have, instead, stayed in the workforce longer prompting employers to use the expensive tool of “termination” as a means of lowering the average age of the workforce and keeping employee population at desirable levels. In such circumstances, DC Plan sponsors should consider among other options:
- Adding decumulation options to help employees ride out this financial dislocation;
- Understanding the effects of a higher inflation environment on member elected options and making adjustments to the member investment menu depending on the results of that review;
In the DB context, a range of strategies should be considered for avoiding trapped surplus, among them all or some of the following:
- Merge plans and/or establish a DC component to an existing or closed DB Plan to facilitate “cross-subsidization” through use of DB surplus to take employer DB or DC contribution holidays.
- Use statutory surplus withdrawal procedures (either a wound up or ongoing plan) to crystalize surplus and extract it from the plan for use elsewhere by the employer
- Consider restructuring the plan’s funding agreement to impose a “new” trust for “new” money and provide certainty of employer title.
- Revise funding/investment strategies to adopt one or more of the following:
- Restrict contributions to the minimum permitted contribution level.
- Implement a de-risking investment strategy.
We’re here to help
McCarthy Tétrault’s national team of pensions, benefits, and executive compensation (PBEC) experts delivers reliable support and strategic counsel for every stage of creating, implementing, and managing any plan. Our PBEC team is ready to discuss your options and help you find a bespoke solution that is lawfully available and works for you.
Une copie française de cet article sera publiée prochainement.