The Voice of Multi-Employer Plan Interests in Canada

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Christian Nordin
Policy Manager 
CAPSA Secretariat
5160 Yonge Street
17th Floor, Box 85

Toronto ON  M2N 6L9

Re: Submission of the Multi-Employer Benefit Plan Counsel of Canada regarding CAPSA’s Consultation on the Draft Guideline on Pension Plan Prudent Investment Practices and Self-Assessment Questionnaire and the Draft Guideline on Pension Plan Funding Policy

 

Introduction:

We are pleased to make this submission regarding CAPSA’s Consultation on the Draft Guideline on Pension Plan Prudent Investment Practices ("Investment Guideline") and Self-Assessment Questionnaire ("Investment Questionnaire") and the Draft Guideline on Pension Plan Funding Policy ("Funding Guideline") on behalf of the Multi-Employer Benefit Plan Counsel of Canada (“MEBCO”).

MEBCO was established in 1992 as a not-for-profit, federal non-share capital corporation, to represent the interests of Canadian multi-employer pension and benefit plans. MEBCO’s volunteer Board of Directors is elected from all professions and disciplines involved in multi-employer plans, including: union and employer trustees; professional third-party administrators; non-profit and in-house administrators; actuaries; benefit consultants; lawyers; and chartered accountants. MEBCO’s membership currently includes many defined benefit, multi-employer pension plans.

Before providing our comments on the Investment Guideline, Investment Questionnaire and the Funding Guideline, we believe it would be valuable to briefly provide some background regarding multi-employer pension plans and, in particular, how they differ from single-employer pension plans. While single-employer pension plans are currently the dominant form of pension plan in Canada, the number of plan members covered in multi-employer pension plans is surprisingly close.

According to the Report of Ontario’s Expert Commission on Pensions issued in October 2008, there are just over 6,000 single employer plans registered in that province, compared to 127 multi-employer pension plans. However, membership overall is “almost evenly balanced between these two types of plans” with 55% of pension plan members belonging to single-employer pension plans and 45% belonging to multi-employer pension plans.

Multi-employer pension plans developed out of the collective bargaining process as a response to the difficulties associated with providing retirement benefits to unionized workers employed in industries typified by small companies and a mobile work force. Members of multi-employer pension plans work in industries as diverse as construction, manufacturing, food service, retail, hotel, restaurant, graphic communications, healthcare, education, garment manufacturing, security, textiles, transportation, and entertainment. A single, multi-employer pension plan may be national, regional, provincial, or local in coverage. Anywhere from two to more than 1,000 employers may contribute to one of these plans in accordance with the terms of the relevant collective agreements. It is estimated that there are approximately 200 multi-employer pension plans in Canada with more than one million members.

A multi-employer pension plan is typically structured as a pension trust fund for purposes of s. 149(1)(o) of the Income Tax Act. The trustees, who may be appointed by both labour and management, or labour only, are appointed pursuant to a trust agreement and are responsible for the administration of the plan and its trust fund. Such plans may handle their administration in-house or hire a third-party administrator.

As noted above, trade unions normally represent members of multi-employer pension plans. In a classic multi-employer defined benefit pension plan, contributions are fixed by a collective agreement and an employer’s only obligation is to pay the required contributions and provide the information necessary to administer the plan. As employers generally cannot be forced to make contributions in excess of those required by the relevant collective agreements, a defined benefit multi-employer pension plan is in reality a target benefit plan as accrued benefits may have to be reduced to alleviate a funding shortfall. Such benefit reductions are currently permitted in all provinces except Quebec and New Brunswick.

Multi-employer defined benefit pension plans based on union-management negotiations are a cornerstone to the provision of retirement income in Canada. Unlike single employer plans, multi-employer pension plans are not being wound up, converted to (or replaced by) defined contribution plans, or subject to wind-up because of the insolvency of a single employer. They are also not the subject of disputes about contribution holidays or the ownership of any surplus as employers are required to continue to make contributions regardless of the funding level of the plan and all contributions are ultimately used to pay benefits or pay administrative expenses. In his May 2007 comments to a Toronto pension conference, then Bank of Canada Governor, David Dodge, stated that multi-employer pension plans are an important method of providing retirement plan coverage and that efforts should be made to promote them.

Submissions:

In these submissions, we first address the Funding Guideline and then the Investment Guideline and Investment Questionnaire.

Funding Guideline:

Different Considerations for Multi-Employer Pension Plans

The first section of the Funding Guideline indicates that the goal of funding a defined benefit pension plan is to ensure that sufficient assets will be accumulated to deliver the promised benefits on an ongoing basis and to protect pension benefits in the event of an employer insolvency or bankruptcy. These statements are more directed towards the circumstances of a single employer pension plan than to those applicable to a multi-employer pension plan ("MEPP") as the insolvency or bankruptcy of a single employer will not impact the benefits of a member of a MEPP.

MEBCO believes that different funding considerations apply in the case of a MEPP.  The Funding Guideline acknowledges this by indicating that, "[d]ifferent funding considerations may apply to single employer pension plans, than to other types of pension plans such as multi employer pension plans (MEPPs)". The distinction between the funding principles and objectives applicable to MEPPs and those applicable to single employer pension plans is further acknowledged in this section through two separate references to exceptions for MEPPs (see last sentence of the second paragraph which refers to the ability to adjust benefit levels in a MEPP and the last sentence of the fourth paragraph which refers to the fact that contribution levels in a MEPP are fixed). The distinct nature of MEPPs is further recognized in the discussion of the elements of a funding policy which indicates that special considerations will apply for a funding policy for a MEPP.

Given the significant differences between single employer pension plans and MEPPs, MEBCO submits that it would be appropriate to address MEPPs in a separate stand-alone section in this Funding Guideline. As noted below, we believe this would also assist in clarifying certain aspects of the Funding Guideline.

Target Benefits

Ontario's Pension Benefits Act was amended through Bill 120 to provide for the creation of a new category of benefits called "target benefits". These amendments to provide for target benefits" will come into force on proclamation. In addition, in August 2010, the Ontario government released a Technical Backgrounder indicating that it was proposing to clarify that certain target benefit MEPPs are exempt from solvency funding requirements. While detailed regulations with respect to "target benefits" have not been released, all relevant material published by the Ontario government indicates "target benefits" may potentially be reduced.

The Funding Guideline does not appear to contemplate this new important category of benefits. MEBCO expects that the benefits provided under many MEPPs will qualify as "target benefits". As such, it is submitted that the Funding Guideline should expressly address the funding considerations applicable to "target benefits" and ideally as part of a separate section.

Role of Plan Sponsor and Role of Plan Administrator

Standard of Care

The Funding Guideline indicates that the funding policy should be developed by the plan sponsor and that in carrying out “activities related to the establishment of a funding policy, the plan sponsor is not held to a fiduciary standard of care”. However, the Guideline proposes that, “[f]or MEPPs, the plan administrator would typically be responsible for the adoption of the funding policy”.

The Funding Guideline does not indicate whether CAPSA is of the view that the administrator of a MEPP would or should be held to a fiduciary standard of care when it develops and establishes a funding policy. As no pension legislation requires that a funding policy be established by a plan administrator, there is no statutory guidance on the standard of care applicable to a pension plan administrator when it undertakes activities related to developing and establishing a funding policy. MEBCO submits that the same standard of care should apply to a plan administrator and plan sponsor in carrying out activities related to establishing and developing a funding policy.

Interpreting the Funding Guideline

The Funding Guideline indicates on page 4 that, "[i]n the discussion of other elements of the funding policy for a MEPP any role that is assumed by the plan sponsor would be assumed by the plan administrator." This statement assists in interpreting the Funding Guideline. However, some references to the "plan sponsor" throughout the Funding Guideline are not in relation to a specific role in the development of a funding policy. For example, there are references to the "plan sponsor's funding objectives" and the "characteristics of the plan sponsor". It is not clear how these references should be interpreted in the context of a MEPP. We submit that this lack of clarity concerning references to the plan sponsor could be remedied by addressing MEPPs separately in this Funding Guideline.

Elements of a Funding Policy

This section addresses various elements that CAPSA believes should be included in a funding policy. One of the headings under this section is "Multi-Employer Pension Plans". As noted earlier, the discussion under this heading concerning the elements of a funding policy indicates that special considerations will apply for a funding policy for a MEPP. This section appears to require the administrator of a MEPP to make determinations in advance as part of the development of the funding policy concerning how benefits will be adjusted, if necessary, and the considerations that should be taken into account in making these determinations.

There are many court decisions which discuss the duty of a plan administrator when making decisions involving benefit changes. These cases indicate that plan administrator must be mindful of its fiduciary duties in making such decisions and further that such decisions can only be properly made after giving proper consideration to relevant factors and excluding irrelevant or improper factors from consideration.  Please see, for example, Neville v. Wynne and Edge v. Pensions Ombudsman.

We submit that it would not be appropriate for a fiduciary plan administrator to determine in advance how benefits will be adjusted, if necessary, and what factors will be considered in making such a determination. We believe that these decisions can only be made in the context of specific circumstances and facts.  The case law supports this view.  As such, MEBCO believes that to make such decisions in advance as is suggested by the Funding Guideline would create a potential conflict with the plan administrator's fiduciary duties. We submit that the funding policy for a MEPP should not be required to bind the administrator to a specific decision or to consider only a limited set of factors.

Investment Guideline and Investment Questionnaire:

The Investment Guideline indicates that prudent investment practices for MEPPs that are collectively bargained with negotiated fixed contributions will take into account the target benefit levels specified in the plan document. MEBCO believes it is appropriate for this to be included amongst the prudent investment criteria for a MEPP. In fact, it seems that it would be appropriate for the investment practices applicable to all plans to consider the particular benefit levels. However, in the case of a MEPP, we believe that the fact that the accrued benefits may be reduced to alleviate a funding shortfall should also be recognized. Neither the Investment Guideline nor the Investment Questionnaire expressly addresses the possibility of a reduction in accrued benefits under a MEPP.  MEBCO submits that this possibility must be expressly recognized in the Investment Guideline and Investment Questionnaire.

As noted above, Ontario's Pension Benefits Act has been amended to provide for the creation of "target benefits".  The Investment Guideline does not appear to contemplate this new important category of benefits. We expect that the investment practices that are prudent and/or appropriate for target benefits may differ from those applicable to other plans. MEBCO recommends that the Investment Guideline and Investment Questionnaire expressly address the investment practices that are appropriate for target benefits.

The Investment Questionnaire does not provide clear direction to plan administrators. Specifically, many of the questions in the Questionnaire are open-ended, multiple choice questions and there is no guidance as to the satisfactory or preferred response from CAPSA's perspective.  For example, the first item in Part 1, provides as follows:

"1. The roles and responsibilities of the plan sponsor and plan administrator (including the different roles of each in the administration and investment of plan assets) are documented in the:

plan text

investment policy

Statement of Investment Policies and Procedures (SIP & P)

other _________________________________"

In this question, it is not clear whether CAPSA's view is that the roles and responsibilities of the plan sponsor and plan administrator should be documented in one of, some of or all of the documents noted above. There are many other examples of this type of open-ended, multiple choice question in the Investment Questionnaire. MEBCO submits that CAPSA's expectations with respect to responses to the Questionnaire should be clarified.

We would be pleased to discuss the Funding Guideline, Investment Guideline and Investment Questionnaire and our comments on these documents with you.  Please do not hesitate to contact the undersigned should you have any questions about this letter, or in the event that we can be of any assistance.

Yours truly,

William Anderson

 

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  1. The threat to multi-employer plans is real.
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  2. Legislative changes can be significant.
    Recent proposed changes have threatened to offload costs onto plans, restrict plan coverage, and have compromised the viability of some plans
  3. Multi-employer plans are worth protecting.
    Multi-employer plans play a vital role in providing health services and retirement plans to over 1 million workers and their families in industries typified by small companies and a mobile work force.
  4. Multi-employer plans need a united lobby.
    Multi-employer plans carry a low profile due to the fact that the coverage is thinly spread over many employer groups and mobile workers.
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