Multi-Employer Benefit Plan Council of Canada
TOM LEVY DRAFT #1 MARCH 2, 2010
Under the Income Tax Act (ITA), there are a variety of limitations with respect to the maximum benefits and contributions that are permissible with respect to registered pension plans (RPPs). With respect to most defined benefit pension plans, those limits are expressed in terms of new benefit accrual constraints. Contribution limits only apply when there is “excess surplus” – that is all accrued benefits are not only fully funded, but are in fact significantly overfunded.
For Specified Multi-Employer Pension Plans (SMEPPs), the limitations are expressed in terms of contributions, rather than benefits. This is logical, because the employers do not have benefit accrual information for each participant and they are obligated to pay negotiated contributions regardless of the SMEPP’s funded position. In general, the contribution is limited to an aggregate of 18% of the pay of eligible participants.
As a result of the unfavourable investment markets since 2001 and other elements of actuarial experience (e.g., retirees are living longer), many SMEPPs are in the unfortunate position of having negotiated contributions that are insufficient to meet provincial or Federal funding requirements with respect to the benefits currently provided by the plan. In most jurisdictions (i.e., other than Quebec, New Brunswick and Manitoba), SMEPPs are permitted to reduce benefits in order to restore the balance between contributions and benefit levels, subject to regulatory approval. Often, this is the only option that is realistically available. In some cases, however, the bargaining relationship and industry economics are such that some or all of the shortfall can be mitigated through higher contributions. From a public policy point of view, that is clearly preferable to failing to meet workers’ retirement income expectations or reducing the pensions of those already retired.
Where the current level of negotiated contributions is significantly below the 18% limit, the ITA does not present any barrier to the contribution increase option. However, some SMEPPs are at or near the 18% rate, and so the ITA precludes contribution rate increases. In the absence of that alternative, benefit reductions are the only alternative available to a plan’s Trustees.
In the case of a typical single employer pension plan, provincial laws generally require that contributions be increased to whatever is required in order to meet provincial funding requirements without reducing benefits. That, of course, improves benefit security and helps to protect participant expectations. It is ironic that the Income Tax Act forbids similar contribution rate increases for certain SMEPPs and therefore compels benefit reductions, which does not improve benefit security and does not protect participants expectations.
MEBCO strongly recommends changes to the ITA to, as a minimum, permit the bargaining parties to increase contributions to maintain existing benefits, exactly as is required for single employer plans.
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