Legislative Proposals Relating to Income Tax and Other Legislation and Explanatory Notes – Specified Multi-employer Plans
October 7, 2019
Tax Policy Branch Department of Finance Canada 90 Elgin Street Ottawa, ON K1A 0G5
Re: Legislative Proposals Relating to Income Tax and Other Legislation and
Explanatory Notes – Specified Multi-employer Plans
The Multi-Employer Benefit Plan Council of Canada (MEBCO) is a non-profit corporation representing the interests of Canadian multi-employer pension and benefit plans.
We are writing to submit our comments and suggestions with respect to the proposed amendments to section 8510(7) of the Income Tax Regulations, C.R.C., c. 945 (the "Regulations"), which would prohibit pension contributions being made to Specified Multi-employer Plans ("SMEPs") by or on behalf of pension plan members who are either over the age of 71, or are in receipt of a pension from the plan.
MEBCO was established in 1992 to represent the interests of multi-employer benefit plans (MEPs) in Canada. MEBCO advocates on behalf of all stakeholders involved with MEPs, including union and employer trustees, independent and professional trustees, professional third party administrators, non-profit or “in house” plan administrators and professionals including actuaries, benefit consultants, lawyers, investment managers, and chartered professional accountants.
MEBCO’s Board of Directors is composed of volunteer representatives of these groups, and is responsible for identifying, addressing, and advocating with respect to all issues impacting multi- employer plans in Canada.
Overview of Submission
MEBCO is opposed to the proposed amendments to the Regulations. The proposed amendments will decrease benefit security, unnecessarily increase the cost and regulatory burden associated with SMEP administration, and are unsupported by any sound policy rationale.
The basic premise of the proposed Regulatory change – that the contributions to a defined benefit type SMEP based on a person’s work provide the funding for that person’s pension accrual - is simply wrong. It is the aggregate contributions support the aggregate plan costs. In a defined benefit type plan there is no direct connection between the cost of an individual’s pension and the contributions based on that person’s work
Overview of the SMEP Regime
SMEPs are a creature of the Regulations, and the main provisions regulating SMEPs are set out under section 8510 thereunder. In order to qualify as a SMEP, a pension plan must meet the following prescribed criteria, set out under subsection 8510(3) of the Regulations:
- it is reasonable to expect that at no time in the year will more than 95% of the active plan members be employed by a single participating employer or related group of participating employers;
- for years after 1990, it is reasonable to expect that:
- at least 15 employers will contribute to the plan during the year, or
- at least 10% of active plan members will be employed in the year by more than one
- participating employer;
- employers participate in the plan pursuant to a collective agreement
- contributions are made by employers pursuant to a formula that does not provide for variations in contributions determined by reference to the financial experience of the plan;
- contributions rates are determined, in whole or in part, by reference to the number of hours worked by employees or some other measure specific to each employee;
- the plan is administered by a board of trustees or similar body that is not controlled by participating employers; and
- the administrator is empowered to determine benefits to be provided under the plan.
SMEPs typically cover employees in specific unionized sectors of the economy with high employee mobility among employers, such as the building and construction, food, service, retail, hotel and restaurant, graphic arts, garment manufacturing, security, textiles, transportation, and entertainment industries. In these sectors, an employee's relationship with his or her trade union is likely to be far more constant than his or her relationship with any single employer. The participating employer's role is largely restricted to remitting contributions (the majority of SMEPs are funded wholly by employer contributions) and reporting hours worked to the plan administrator.
The SMEP Regulations impose contribution limits in the aggregate; more particularly, contributions to a SMEP are deemed to be eligible contributions if the following conditions, set out under subsection 8510(7) of the Regulations, are satisfied:
- when employer and member contribution rates under the plan were last established, it was reasonable to expect that, for each calendar year beginning with the year in which the contribution rates were last established,
- the aggregate of all amounts each of which is the pension credit of an individual for the year with respect to an employer under a benefit provision of the plan would not exceed
- 18 per cent of the aggregate of all amounts each of which is, for an individual and an employer where the pension credit of the individual for the year with respect to the employer under a benefit provision of the plan is greater than nil, the compensation of the individual from the employer for the year, except that this condition does not apply for years before 1992 in the case of a pension plan that is a grandfathered plan; and
- where the plan contains a money purchase provision,
- the plan terms are such that, if subsection 147.1(9) of the Act were applicable in respect of the plan, the plan would not under any circumstances become a revocable plan at the end of the year pursuant to that subsection, or
- if the plan terms do not comply with the condition in subparagraph (i), the only circumstances that would result in the plan becoming a revocable plan at the end of the year pursuant to subsection 147.1(9) of the Act, if that subsection were applicable in respect of the plan, are circumstances acceptable to the Minister.
This aggregate contribution limit is a legislative reflection of the following unique features of the funding, governance and administration of SMEPs:
- contribution rates are fixed through the collective bargaining process;
- participating employer obligations are limited to these negotiated contribution rates, and employers are exempt from the requirement to make additional contributions in the event that the plan is underfunded;
- the plan is administered by a board of trustees, comprised of representatives of active members’ trade unions and, frequently, representatives of participating employers (though no more than 50% of representatives may represent management); and
- the day to day administration of the plan (including collecting contributions and processing benefit payments) is typically performed by an administration services provider, or, at times, the trade union.
The current SMEP Regulations implicitly recognize the multi-faceted nature of the governance, funding and administration of these plans, and serve as a practical response to the difficulties that would otherwise be encountered in the event that such plans were required to comply with the individual member contribution limits applicable in respect of other kinds of registered pension plans.
The Regulations also recognize a trade-off implicit in the overall structure of SMEPs; permissible contribution limits are determined in the aggregate, simplifying plan administration, while prohibiting special payments by participating employers or plan members in the event that the plan is underfunded.1 This is different from the treatment of single employer pension plans ("SEPPs") which provide defined benefits to members; the sponsors of such plans are permitted to make special contributions when the plan is underfunded, provided such contributions are required under provincial pension minimum standards legislation (pursuant to ss. 8516(3) of the Regulations).
Reduced Benefit Security
One of our primary concerns with the proposed amendment is the impact it will likely have on benefit security. As we note above, participating employers are prohibited by Regulations from making special payments in accordance with provincial or federal minimum standards pension legislation, as contributions are limited to the rates negotiated through the collective bargaining process. Such negotiations assume that participating employer contributions will be made to the plan on behalf of all plan members - including re-employed retired plan members or members over the age of 71 and funding and contribution rates are set on the assumption that contributions will be made by employers for all hours worked by plan members. Prohibiting such contributions will undoubtedly result in a reduction in the contributions being made to SMEPs, which will in turn result in a corresponding reduction in benefit security.
The importance of such contributions to SMEPs cannot be overstated. Unlike defined benefit SEPPs, which require employers to make additional contributions to the pension plan in cases of underfunding, multi-employer plans are generally required by legislation to reduce benefits (both prospective and accrued) when the plan is underfunded. Thus, the proposed amendment could have the impact of requiring some SMEP administrators to reduce prospective or accrued pension benefits, which we do not believe is a desirable, or indeed, the intended outcome of the proposed amendment. In such cases, retired members and members over age 71 would in fact be even more adversely affected by the proposed changes, as they would be unable to accrue additional benefits to offset any reductions in accrued benefits.
The proposed amendment will also impose an unnecessary and costly administrative burden on SMEPs.
SMEPs are jointly administered by a board of trustees, normally comprising of representatives of labour and management, but the day to day administration of most SMEPs is typically carried out in- house, or by third party administration services providers. Employer contribution rates are fixed by collective agreement, and are typically remitted to plan administrator or trade union on a monthly basis, along with other remittances required under the applicable collective agreement. The determination of monthly contributions by employers is, in the large majority of cases, determined as a function of total member hours worked, and aggregate contributions are remitted by participating employers in a single cheque or electronic transfer to the administration services provider, who is responsible for allocating received monies to the appropriate fund. While hours worked and contributions remitted must generally be tracked by administration services provider for the purposes of determining benefit entitlement, the vast majority of the systems used by administrators do not currently track contributions based on the basis of members' ages – and participating employers may or may not know whether their employees are in receipt of a pension. Also, in a multi-employer plan, members may be employed by several different employers throughout a calendar year, further complicating the administration and reporting. If the proposed Regulatory changes were implemented and an employer then does remit pension contributions to a SMEP on account of hours worked by a re-employed pensioner, this would cause the SMEP significant administrative costs. In most Canadian jurisdictions, a pension plan could not simply refund the contributions to the employer; rather, the SMEP would have to apply to the pension regulator for its consent to refund contributions remitted in error. Once again, this would needlessly increase the cost to the SMEP and thereby decrease assets available for benefits.
Thus, administrators, with the assistance of participating employers, will be required to update their administration systems to ensure that otherwise ineligible contributions are not mistakenly remitted to the pension fund, should the proposal be implemented.
While the cost and administrative burden associated with the proposed amendment may appear trivial, these must be assessed in light of the policy underlying the proposed change. In our view, there is no cogent policy rationale justifying the proposed amendment – in fact, the amendment will have the deleterious effect of undermining pension benefit security.
No Clear Policy Rationale
In our view, the proposed amendment to the Regulations presents itself as a solution in search of a problem. The 2019 federal budget provided the following policy considerations underlying the proposal:
In general, the pension tax rules effectively ensure that contributions to a defined benefit registered pension plan (RPP) in respect of a member are not made after the member can no longer accrue further pension benefits. Under the tax rules, pension benefits may not be accrued by a member after the end of the year in which the member attains 71 years of age or if the member has returned to work for the same or a related employer and is receiving a pension from the plan (except under a qualifying phased retirement program).
However, in the case of a specified multi-employer plan (SMEP), a specific type of union-sponsored, defined benefit pension plan, employer contributions are deemed to be eligible contributions in order to ensure that such plans can operate effectively under the pension tax rules. Consequently, and in contrast to other defined benefit RPPs, employers are not prevented by the pension tax rules from making contributions to a SMEP in respect of workers over age 71 or those receiving a pension from the plan, if such contributions are required by the plan. Furthermore, in requiring an employer to contribute in respect of employed union members, some collective bargaining agreements and SMEP plan terms do not prevent contributions in respect of workers in these situations. Such contributions do not benefit the member because they can no longer accrue any corresponding pension benefits under the plan.
The foregoing draws a false equivalency between the funding and contribution rules applicable to SEPPs, and those applicable to SMEPs. As we note above, employers in SEPPs are permitted to make contributions to pension plans, both on account of plan member current service as well as on account of past service unfunded liabilities or solvency deficiencies, pursuant to ss. 8516(3) of the Regulations. Retired SEPP members, and SEPP members over the age of 71, do not accrue any further benefit entitlements when special payments are remitted to a SEPP to fund such benefits – however, they do enjoy greater benefit security as a result of these contributions. Retired SMEP members and SMEP members over the age of 71 are similarly situated – while they accrue no further benefits when contributions are remitted to the plan, they do gain greater benefit security as a result of such contributions. In a SMEP, it is the total aggregate contributions to the plan that support the aggregate benefits. A board of trustees of a SMEP set benefit levels based on the aggregate contributions in the plan. If the aggregate contributions are not sufficient to provide the benefits set out into the plan, the trustees of a SMEP may be required to reduce accrued benefits, including pensions in pay. As a result, pensioners in a SMEP, are more at risk than similarly situated SEPP members, as their pensions may be subject to reductions in the event the plan becomes underfunded.
Further, as the contributions to a SMEP are typically set out in a collective agreement as employer contributions, if a SMEP were unable to accept contributions on behalf of re-employed pensioners or members over the age of 71, there would be no clear advantage flowing to these pensioners and members. If a SMEP were unable to accept these contributions, the SMEP could not simply pay these amounts to the pensioners; instead, the SMEP would be obligated to simply not accept these amounts or return the contributions to the employer.
For the reasons set out above, MEBCO strongly encourages the federal government to reconsider the proposed amendment to subsection 8510(7) of the Regulations.
1 Regulations, ss. 8510(7). See also ss.8510(3)(e): SMEP contributions must be ". . . made by employers in accordance with a negotiated contribution formula that does not provide for any variation in contributions determined by reference to the financial experience of the plan. . . ."
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