Changes would prompt eight in 10 sponsors to back away from DB: poll
Employers in Quebec are vigorously opposing a proposed pension bill that contains several measures not seen anywhere else in Canada.
These include a requirement for sponsors to build a reserve fund if a plan is less than 100-per-cent solvent, a provision for future retirees to have their pensions insured and an allowance for any interested party to object to amendments by referring the matter to an arbitrator.
In a survey of sponsors of 120 defined benefit (DB) pension plans conducted by Mercer Human Resource Consulting, eight in 10 said if the bill passes as is, it will encourage them to replace DB pension plans with defined contribution plans.
The Federation of Quebec Chambers of Commerce voiced similar opposition. Many of the measures place a burden on businesses that they “simply cannot assume,” said Françoise Bertrand, the federation’s director general, in a statement.
If employers are required to set aside seven per cent of the pension fund to build a reserve, called a “provision for adverse deviation,” it would result in $5 billion being taken out of the hands of businesses that would have otherwise gone into capital investment, the federation said. (This seven per cent figure is hypothetical because the minister of labour, who tabled the bill in June, has not yet indicated how big that reserve has to be.)
Danielle Ethier, an actuary at Watson Wyatt’s office in Montreal, said although the reserve would be accumulated through actuarial gains — gains in actual performance as compared to assumed performance — and not through direct contribution, the effect is the same. A plan that’s not solvent one year may turn out to be 103-per-cent solvent the next. Regardless, the plan sponsor would still have to keep building the reserve and would be unable to take a contribution holiday.
“If we think about the competition between employers, (this provision) will be a disadvantage for employers with plans registered in Quebec,” she said.
Michel St-Germain, a principal at Mercer, drew attention to the proposal that people heading into retirement could have their pensions converted into a lifetime annuity purchased from insurance companies. If they choose that option, they’ll forego any surplus distribution or indexation that remaining plan members enjoy. On the other hand, they may come out ahead if a plan winds up with a deficit.
This option would result in increased contribution from plan sponsors, he said.
“Those plans weren’t funded on the basis that assets would be transferred to an insurance company,” said St-Germain. “Insurance companies charge a rather high price to provide that guarantee.”
The difference could mean an increase of 10 to 15 per cent, he added.
Another matter of concern to both St-Germain and Ethier is the requirement to take into account “equitable treatment” whenever a plan sponsor makes a change, such as increasing benefits or indexation.
Current legislation does not require member consent for most plan amendments. Where consent is required by law, consent is deemed to be given if less than 30 per cent of members are opposed.
Under the proposed bill, even an individual employee or a retiree could object to changes, said Ethier. Plan amendments, typically made in the context of labour negotiations, generally involve trade-offs. Allowing an individual who has already retired, hence with nothing to lose, to object to an amendment may ultimately make sponsors unwilling to make any change whatsoever, she said.
At the Régie des rentes, the government agency overseeing pension plans in Quebec, spokesman Herman Huot declined to comment on any part of the bill. The government has been hearing submissions from all interested parties, including unions and employer groups, and parts of the bill may end up being amended, he said.
These include a requirement for sponsors to build a reserve fund if a plan is less than 100-per-cent solvent, a provision for future retirees to have their pensions insured and an allowance for any interested party to object to amendments by referring the matter to an arbitrator.
In a survey of sponsors of 120 defined benefit (DB) pension plans conducted by Mercer Human Resource Consulting, eight in 10 said if the bill passes as is, it will encourage them to replace DB pension plans with defined contribution plans.
The Federation of Quebec Chambers of Commerce voiced similar opposition. Many of the measures place a burden on businesses that they “simply cannot assume,” said Françoise Bertrand, the federation’s director general, in a statement.
If employers are required to set aside seven per cent of the pension fund to build a reserve, called a “provision for adverse deviation,” it would result in $5 billion being taken out of the hands of businesses that would have otherwise gone into capital investment, the federation said. (This seven per cent figure is hypothetical because the minister of labour, who tabled the bill in June, has not yet indicated how big that reserve has to be.)
Danielle Ethier, an actuary at Watson Wyatt’s office in Montreal, said although the reserve would be accumulated through actuarial gains — gains in actual performance as compared to assumed performance — and not through direct contribution, the effect is the same. A plan that’s not solvent one year may turn out to be 103-per-cent solvent the next. Regardless, the plan sponsor would still have to keep building the reserve and would be unable to take a contribution holiday.
“If we think about the competition between employers, (this provision) will be a disadvantage for employers with plans registered in Quebec,” she said.
Michel St-Germain, a principal at Mercer, drew attention to the proposal that people heading into retirement could have their pensions converted into a lifetime annuity purchased from insurance companies. If they choose that option, they’ll forego any surplus distribution or indexation that remaining plan members enjoy. On the other hand, they may come out ahead if a plan winds up with a deficit.
This option would result in increased contribution from plan sponsors, he said.
“Those plans weren’t funded on the basis that assets would be transferred to an insurance company,” said St-Germain. “Insurance companies charge a rather high price to provide that guarantee.”
The difference could mean an increase of 10 to 15 per cent, he added.
Another matter of concern to both St-Germain and Ethier is the requirement to take into account “equitable treatment” whenever a plan sponsor makes a change, such as increasing benefits or indexation.
Current legislation does not require member consent for most plan amendments. Where consent is required by law, consent is deemed to be given if less than 30 per cent of members are opposed.
Under the proposed bill, even an individual employee or a retiree could object to changes, said Ethier. Plan amendments, typically made in the context of labour negotiations, generally involve trade-offs. Allowing an individual who has already retired, hence with nothing to lose, to object to an amendment may ultimately make sponsors unwilling to make any change whatsoever, she said.
At the Régie des rentes, the government agency overseeing pension plans in Quebec, spokesman Herman Huot declined to comment on any part of the bill. The government has been hearing submissions from all interested parties, including unions and employer groups, and parts of the bill may end up being amended, he said.
