Alberta Consultation Paper – Private Sector Pensions Review
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The Multi-Employer Benefit Plan Council of Canada (MEBCO) was established in 1992 to represent the interests of Canadian multi-employer pension and benefit plans (MEPs). MEBCO consults with provincial and federal governments regarding proposed or existing legislation and policies affecting these plans. MEBCO is a federal no-share capital corporation, operating on a not-for-profit basis.
MEBCO is representative of all persons and disciplines involved in MEPs, including trustees (union, independent, professional and employer), professional third-party administrators, non-profit or “in- house” plan administrators, and professionals including actuaries, benefit consultants, lawyers, investment managers, investment counsel and chartered public accountants. MEBCO is administered by a Board of Directors consisting of representatives from each of the above groups. The Board of Directors serve MEBCO on a volunteer basis, and are responsible for identifying issues that impact MEPs, developing a strategy to address those issues, and then carrying out the strategy. MEBCO’s member-plans provide comprehensive pension and health coverage to over 1,000,000 Canadians.
In Alberta specifically, MEBCO represents the CBMEPs with the largest pool of assets. MEBCO Feedback
Thank you for the opportunity to provide feedback on the Private Sector Pensions Review Consultation Paper (CP). Below we provide responses to the specific questions (provided in bold) applicable to our constituents.
It has been a number of years since the PfAD for CBMEPs was introduced in Alberta in 2014. Should the PfAD for CBMEPs be updated?
MEBCO does not endorse a minimum PfAD and advocates that the setting of margins including the PfAD should be left to the fiduciaries and their actuary to determine. If a PfAD is to be set in legislation, the proposed required minimum PfAD of 7.5% is much more feasible and reasonable compared to the current PfAD requirement. We stress that the additional principles-based PfAD should be set solely at the discretion of the fiduciary plan administrator based on its approach to establishing benefit levels and taking into consideration the plan’s unique characteristics and circumstances. In addition, any additional PfAD should be allowed to be reflected in the actuarial assumptions and should not be limited to explicit PfADs only. As is the current practice for many CBMEPs, documenting the PfAD and its supporting rationale in the Funding Policy is an appropriate practice.
As we have noted in the past, requiring plans to fund to a level that is greater than the sum of a PfAD plus the plan’s liabilities before allowing the granting of benefit improvements or restoration of past benefit reductions is a feature of the current framework that adds to intergenerational inequities. Therefore, benefit improvements and restoration of past benefit reductions should be allowed if the plan’s contributions are able to support the cost of the change, including the PfAD on the normal cost.
We do note that the requirement to fund the PfAD on the normal cost unless the going-concern funded ratio, including the PfAD, exceeds 105% is counter-intuitive, especially in a plan where the contributions are fixed as is the case with CBMEPs. Typically, margins and reserves are established and accumulated during times when the plan is well funded and has positive experience, to then be used during times of challenging experience. We do not object to a relief from including the PfAD in the normal cost if the funded ratio, including the PfAD, exceeds 105% but suggest that a similar relief be provided in circumstances where the requirement to fund the PfAD may result in benefit reductions. For example, during periods of challenging experience, CBMEPs may be required to amortize an unfunded liability. The requirement to fund both the PfAD while amortizing an unfunded liability will, for most plans, result in benefit reductions.
If funding is to include a required minimum PfAD, we suggest proposed funding amend the uses of the plan’s going concern surplus and the accessible going concern surplus. Under the current funding requirements, the surplus of the plan (equal to the plan’s PfAD) is not an effective buffer to be used to offset costs during tough times as it is not accessible to pay for benefit accruals. Often when markets have a correction it leads to interest rate decreases, which leads to increases in the plan’s normal cost. Having access to the plan's full surplus (including PfAD) during these times would help plans manage through these periods without undue hardship to its members. We do support that plans should be required to have fully funded PfADs to make benefit enhancements but feel it is counterproductive to limit a plan’s ability to utilize a PfAD surplus when it is needed to maintain current benefit levels.
We suggest the following change to the proposed funding requirements. If the plan has a funded ratio greater than 100%, the plan can utilize all surpluses in the plan, not just accessible surplus in meeting its minimum funding requirements for the plan before being required to reduce accrued benefits or future benefit accruals. The use of surplus below the accessible going concern surplus would only be applicable for maintaining the current benefit levels (i.e., not requiring plans to reduce accrued benefit or future benefit accruals) to meet minimum funding. If the plan could not meet minimum funding requirements after using all plan surplus during the inter-valuation period, then the plan would be required to provide a solution to the Superintendent which may include benefit changes.
In addition, the PfAD on the normal cost should only be required if the plan is fully funded. A more appropriate application when the plan’s funded ratio is below 100% would be to require a provision of the greater of the PfAD and the amount required to amortize any unfunded liability. This would ensure that any unfunded liability be eliminated and once achieved, the PfAD on the normal cost can recommence and the plan could start rebuilding its buffer and a true PfAD.
o In the event this option is preferred, what other recommendations are suggested to ensure the discount rate assumption in a going concern valuation isn’t aggressively leveraged in an attempt to mitigate or offset the impact of this PfAD amount?
We do not agree with any of the above alternative options. All these options would still result in PfADs that are excessive and/or include elements that result in variability in the PfAD. Given that contributions to CBMEPs are fixed, having funding variability can only result in benefit variability. This makes financial management very difficult and limits the trustees’ ability to manage the plan prudently for its specific circumstances.
As noted above, consideration should be given to an approach that requires a funding provision which is the greater of the PfAD and the amount required to amortize any unfunded liability. Once the unfunded liability is eliminated, the PfAD on normal cost can recommence.
The alternative options listed above included maintaining only the asset allocation component. The current asset allocation component of the PfAD alone is still too large but if such an approach is to be explored, the PfAD applicable to Limited Liability Plans in Saskatchewan would be more in line with what could be feasible for CBMEPs.
This paper has attempted to describe what we have heard from private sector pension plan stakeholders in Alberta, in terms of need for funding rule changes. However, are the issues and challenges identified still accurate, comprehensive, and current? What are the risks if Alberta’s funding rules are not updated for private sector pension plans? Are there any other issues related to private sector pension funding that you would like to raise?
Yes, all issues and challenges identified with respect to CBMEPs are still accurate and current. The issues and challenges have been further compounded by the current environment. For example, the high levels of inflation have reduced the purchasing power of the pensions currently being paid from these plans. Many pensioners are in desperate need of some level of inflationary increases, especially in cases where pensions had been reduced in the past due to insufficient funding. Now, at a time when these plans have recovered and funding is available, restoration of these past reductions and much needed inflationary increases cannot be provided due to the current PfAD requirements.
The outcomes of the current PfAD funding regime erode member confidence in CBMEP trustees, despite their prudent, effective, and efficient management of the plan. Member confidence is further eroded in pension plans and in governments that approve and keep such funding rules in place. This will lead to fewer, not more, target benefit plans (TBPs). In addition, existing
CBMEPs/TBPs may come under pressure from younger members to reduce or redirect contributions elsewhere, given the potentially modest benefits they will provide under the current funding regime.
Further risks include the damaged reputation of the trustees and governments, as well as the risk of legal challenges.
Please share your thoughts on the proposed annuity purchase requirements (together):
CBMEPs have not traditionally purchased annuities to satisfy liabilities however this investment option is permitted in most investment policies and could provide an opportunity to many plans, CBMEPs and others. Consistent with current legislation in other provinces, Alberta’s legislation should provide for complete discharge of liability for the plan board/fiduciary. Since the fiduciary
is making the decision regarding the purchase of annuities, plan member consent should not be needed. Bargaining agents and plan sponsors should be informed of the transaction. Disclosure must be required including the applicable party holding the annuity, its terms and contact information. This information must be kept by the plan. Part of the fiduciaries’ due diligence would include ensuring the insurer has an acceptable credit rating or Alberta legislation could prescribe the credit rating that must be in place at the time of purchase. Fiduciaries should also ensure that annuities purchased do not exceed the applicable federal or provincial insurance on an individual annuity.
The insurer holding the annuities should be required to have an unlocated member tracking policy such that it is responsible for locating persons whose address and other contact information are no longer applicable. This will ensure that plan members do not become detached from their pensions.
In addition to applying to all retirees, former members and survivors, the annuity purchase (and corresponding liability discharge) should also be permitted for certain classes of active plan members. This includes active members of frozen defined benefit or target benefit pension plans, such as members of a flat benefit plan that is converted to a defined contribution for future service. In this example, as the frozen benefit will not change, it is similar to the benefit of a former member, and we see no practical or policy reason to prevent the annuitization of the benefit.
Feedback is sought on the following: Should the restriction on retroactive conversion of plans from defined benefit to target benefit be removed from the Act for CBMEPs? Permitting retroactive conversion of defined benefit to target benefit for non-CBMEPs is not proposed.
CBMEPs have operated as target benefit plans since their inception. Reduction of accrued benefits is one lever that might be used in the event of funding issues. The lever has been used by many CBMEPs. The legislation should now clearly provide that conversion to a target benefit includes retroactive conversion of defined benefits to target benefits since, as noted for CBMEPs this has been a flawed distinction that results in confusion for plan members. This also allows consistent use of the term “target benefits” across the country.
Given that CBMEPs have effectively operated as target benefit plans since inception, a conversion to a target benefit plan would not result in any change in how the plans are administered, operated, and managed. Most importantly, a conversion to a target benefit plan would not result in any negative implications to plan members and therefore, we do not believe member consent should be required to allow for conversion. The election to convert accrued benefits should be at the discretion of the plan administrator – i.e. the fiduciary board of trustees.
As pointed out, this is not really a conversion, but a proper definition of the benefits offered through these plans. However, it should be noted that the conversion of CBMEP to target benefit in a formal filing and communication to members causes undue confusion and unnecessary costs to CBMEPs. We offer an alternative to converting CBMEPs to target benefit plans: we propose simply permitting a CBMEP to fund under the same set of rules as plans with target benefit provisions. If the Act and Regulations clarified that CBMEP benefits fall into the same category as target benefit and therefore are subject to target benefit funding rules, then no conversion would be necessary for these plans as they would simply continue to fund and manage the plans as they have been. If there was a case where a CBMEP wanted to fund under the DB (Defined Benefit) rules and meets the definition to do so, it should convert to a DB and communicate to members that benefits are guaranteed.
If the conversion was required to fund under target benefit rules for a CBMEP we do not believe member consent should be required. At most, we feel union consent should be sufficient to permit the conversion. Every effort should be made to minimize any cost related to conversion.
Should the legislation be amended to enhance decumulation options to authorize VPLAs and ALDAs?
If yes, should the Act provisions merely adopt, by reference, the applicable Income Tax Act provisions, or should more substantial detail be contained within the Act?
Alternatively, are different approaches appropriate; for example, should ALDAs be authorized as a portability option whereas more substantive rules be established for a VPLA (for example, as seen with the rules applicable to Life Income Type Benefits)? Should commutation for small amounts, shortened life expectancy, and/or non-residency be permitted for VPLAs and/or ALDAs?
MEBCO’s membership includes several large DC plans. As has been noted in many educational papers, including those issued by CAPSA, members of DC plans need to be given appropriate tools to manage their accounts in the accumulation and decumulation phases. Allowing VPLAs and ALDAs would allow more flexibility for DC plan members.
To ease the adoption, administration, and efficiency of VPLAs and ALDAs, we strongly suggest that the provinces, including Alberta, should copy or even defer to the Federal regulations once they are finalized. This consistent approach across provinces will be helpful for multi jurisdictional plans.
Feedback is sought on whether the Act should restrict unlocking for reduced life expectancy to those individuals who are within two years of dying (or some other quantifiable threshold)?
Legislation should provide more guidance with regard to the definition of reduced life expectancy. Without it plan fiduciaries are left with decisions which are inconsistent. To be consistent with legislation in other provinces, the definition of reduced life expectancy should be a life which, based on medical evidence filed with the plan by the member’s medical doctor, is less than two years (or some other reasonable and specific timeframe).
While wholesale changes to the provisions applicable to the division of pension benefits upon relationship breakdown are not being contemplated at this time, Treasury Board and Finance seeks feedback on potential clarifying amendments to the Act and regulation regarding the rules on relationship breakdown as follows:
scenarios; and sometimes multiple requests for statements are received with respect to the same pension (using different relationship breakdown dates). Currently, the language of this section, coupled with the language of s.37 of the Act, can be
interpreted such that fees are permitted to be charged for this work only after the actual division of the pension has occurred.
Pension plans should be required to issue one statement only for the purpose of division of assets. Pension plans should be able to decide, thereafter, if they will provide any further information with the plan’s cost to provide such information allocated fully to the applicable plan member or pension partner. Alternatively, the plan should be able to direct that the parties use a third party independent of the pension plan with the plan only then responsible for administration of a breakdown document that is compliant with applicable legislation. The initial statement would provide the information needed for subsequent calculations by an independent party.
The maximum fee that can be charged for the first statement should be increased to $2,000 to more closely approximate the actual cost of the skill levels needed to provide the information. Legislation should make it clear that the amount must be paid to the plan before the plan issues the statement and that the pension plan is not responsible for allocating the fees between the pension partners.
The principle is that other plan members should not have the resources available for pension benefits used for the benefit of one or a small group of members.
We agree that the disclosure statement should identify the member’s designated beneficiaries. A reasonable implementation period must be provided to allow plan administrators time to amend applicable documents.
We agree that the requirement for recalculation in accordance with s. 82(14) of the regulation is problematic for the reasons noted above and we would recommend the requirement be removed under certain circumstances.
In the case of a marriage breakdown, the pre-division entitlement is determined for the purposes of equalizing the assets of the couple. This value is then typically used in finalizing a matrimonial property order/agreement. As noted, the parties do not have an appreciation that the value may change, and that change can be problematic once the terms have been agreed to. Therefore, where there is only the option for an immediate settlement (e.g. if separation occurs more than 10 years away from an active member’s pension eligibility date and the plan does not allow otherwise), then a recalculation of the commuted value would be in effect changing the event date which differs from that of the date of marriage breakdown, the basis for assessing the value of property at that time. Where the option of deferring settlement is permitted and elected by the former spouse, then the recalculation of the commuted value at the time of final settlement (when the member ceases active membership) would then seem to be reasonable. In effect the former spouse has decided on a share of the pension, taking the risk of when and if the member ceases active membership (as would normally be the case if the parties were still a couple).
We propose that when an immediate transfer of funds is the payment option, that the commuted value should not be recalculated, and instead interest update only be applied. In cases where a recalculation is required, the pension plan should be able to make a charge of up to $500 for the second calculation such amount paid to the plan before the calculation is issued.
Should the notice of incorrect remittance of contributions required by s.58(6) of the regulation and s.56 of the Act also be provided to the applicable employer? If legislation requires the participating employer to be notified at the same time as the Superintendent, it may allow rectification of the issue before the Superintendent needs to get involved.
Yes. In addition, the thresholds for reporting on Form 21A should be changed from 10% to 25% as the current rules force small plans to submit revised forms too frequently.
In a related topic, should s.59 of the Act, Refund of contributions to avoid revocation, be amended to accommodate changes to the federal Income Tax Act (Canada), to allow for the return of contributions made in error within the same year and not require the consent of the Superintendent for the return? If yes, should the Act specify that the Superintendent must be notified of the return?
MEBCO supports an amendment to s.59 of the Act to allow a return of contributions paid in error to a pension plan for a person who has a) retired under a DB provision of a CBMEP that does not have a DC component or b) who is over the age of 71 such that the consent of the Superintendent is not required. We would support that the plan administrator advise the Superintendent annually in arrears of all such refunds. The Act should not specify that the Superintendent be notified of the return of funds and that this be reported on an annual basis. It should be noted that some collective agreements will provide for the re-direction of contributions for re-employed pensioners.
Should s.58 (Deemed trust) of the Act be amended to align with BC and add a new subsection to clarify that any contributions which are due and owing to the plan are deemed to be held separate and apart from the assets of the employer in the above situations?
MEBCO agrees that s.58 (Deemed trust) of the Act be amended to add a new subsection to clarify that any contributions which are due and owing to the plan are deemed to be held separate and apart from the assets of the employer.
Should s.72 be amended to extend protections to life annuities that have been purchased with pension funds? The change would be consistent with changes made to the BC PBSA.
MEBCO agrees that s.72 of the Act should be amended to extend non-assignment protection to life annuities that have been purchased with funds from a registered pension plan.
Further, to align with the protections given to other registered products as a result of Alberta’s Bill 20: Civil Enforcement Amendment Act, 2009, should s.72(5) of the Act be amended by adding the words “made before, on or after October 1, 2009” after “additional voluntary contributions and optional ancillary contributions”? This change will add additional clarity that AVCs and OVCs made before October 1, 2009 are still exempt from execution, seizure or attachment even if made prior to this date (unless execution, seizure or attachment was initiated before the date).
MEBCO agrees that s.72(5) of the Act should be amended by adding the words "made before, on or after October 1, 2009" after "additional voluntary contributions and optional ancillary contributions".
Under s.89 of the Act, the priority of payments on the death of a member prior to that member’s pension commencement, is first to the pension partner, or if there is no pension partner or the pension partner has waived, to one or more of the member’s designated beneficiaries.
While rare, situations have occurred in which a designated beneficiary either does not wish to receive the payment of the death benefit or dies prior to receiving the payment. At present, the Act is silent on the obligations of a plan administrator in such circumstances.
We seek your input on how to resolve such scenarios. In the case of a beneficiary who refuses payment, the Act could expressly permit the beneficiary to waive the entitlement. If this occurs, options for the payment include: the amount that would otherwise have been payable to that individual could instead be paid to the remaining designated beneficiaries, if any, in equal proportion; or this amount could be paid to the member’s estate.
In the event that a beneficiary dies before receiving payment, the Act could parallel the existing requirement under s.89(4) whereby the benefit is paid first to whomever the designated beneficiary had named as a beneficiary or failing that, to the estate of the designated beneficiary. Other approaches may also be preferred.
MEBCO supports that a pension partner be able to waive an entitlement under a pension plan prior to, but not after, the date of death of the plan member.
Without an order of a Court, the plan benefit should not be payable to new persons, not named by the plan member as the current beneficiaries. For example, a divorced or separated spouse who is named as the beneficiary should not be able to name other persons, not also named as beneficiaries, to receive pension entitlements without an order of a Court. Court orders should be at the expense of the pension partner and other beneficiaries, as applicable, not the pension plan.
A person who is named as the spouse/pension partner of the plan member should not be permitted to decline a payment on the basis of that status of a spouse/pension partner yet claim the benefit as an ordinary beneficiary.
There should be no objection if the trustees wish to have a full statutory release as part of its acceptance of such a waiver.
Should the Alberta Employment Pensions Tribunal be repealed? Regardless of your position on the Tribunal, are there other approaches (other than a review by a court) which might be taken to the review of a certain decision of the Superintendent of Pensions to determine if the decision is consistent with the requirements and intent of the Act?
The Alberta Employment Pensions Tribunal should not be repealed. MEBCO notes that this question was asked in the last consultation paper and that all CBMEPs responding agreed the Tribunal should remain to hear appeals of regulator decisions and to act as a "check and balance" to greater regulator discretion. The Tribunal should be comprised of persons independent of the regulator and at arms length from any decision of the regulator sent to the Tribunal.
The rules of the Tribunal should be codified as should the time required for the regulator to respond to plan sponsor communications – as is required of the plan sponsor to reply to the regulator.
Should the eligibility for enrolment in a CBMEP be amended to revert back, exclusively, to the rules which applied prior to 2014 (based on 350 hours of employment per year for two consecutive years)?
Or, should the Act instead, permit plan membership for CBMEPs to include 350 hours of employment (new) or 35 per cent of YMPE annually (current)?
We do feel allowing the plan the ability to choose the hours-based or percentage of earnings threshold should be established and defined in the CBMEP’s plan text. This would provide plans that have multiple reporting and collective bargaining agreements to define and administer participation requirements more readily based on employer reporting and agreements. Further, we are aware of other CBMEP plan designs where benefits are based entirely on contributions received and neither earnings nor hours are tracked (or that data is not even collected). Accordingly, while we support the replacement of the 35% of YMPE rule with greater flexibility to use hours, we also advocate for a clause that allows the plan to develop an alternative rule that complies with the intent of the legislation and has been crafted to the Superintendent’s satisfaction.
Should the Act permit member access to information and records each calendar year (as opposed to once every 12 months)?
MEBCO supports retaining the current approach.
Should the restriction on a spouse (who waived their benefit) from receiving the benefits as the designated beneficiary of an estate be removed from the Act?
MEBCO agrees that the restriction that prevents a spouse who waived their benefit from receiving benefits as a designated beneficiary of an estate should be removed from the Act.
Should the restriction on a spouse from being able to waive pension benefits after the retiree’s death be removed from the Act; more specifically, to permit the death benefit waiver form under s.90(6) to be completed prior to, or after, the death of the plan member?
MEBCO agrees that the restriction that prevents a spouse from waiving their pension benefit after the retiree’s death should be removed from the Act.
For the DC plans that are members of MEBCO, participation in the plan and the rate of contribution are typically set by collective agreement. This results in these automatic features being in place by default because of the terms of those agreements. Therefore, these features should continue to be set by the terms of the collective agreement and do not need to be codified.
Should the Act be amended to provide the Superintendent with the authority to exempt a plan, on a case-by-case basis, from the requirement to keep records in Canada, subject to any such terms and conditions as the Superintendent considers appropriate.
MEBCO agrees that there should be flexibility on the location of electronic plan records. MEBCO supports that physical records be retained in Canada. The Act should provide that records must be producible within 30 days of request.
Should s.50 (Filing of financial statements) of the regulation be amended to remove the requirement for audited financial statements to include liabilities?
Further, should the requirement that audited financial statements be submitted annually, be amended to permit custodial financial statements to be submitted instead for non-CBMEPs and plans without defined benefit components with assets under $10 million?
MEBCO supports the removal of the requirement of including liabilities in the financial statements. Including the liabilities is an added cost that provides little added value to members of the plan.
MEBCO supports the filing of custodial statements for small pension plans but comments that this should also be available to CBMEPS under the threshold.
We thank you for your time and consideration and look forward to your response.