The federal government is introducing changes to the rules governing pension plans under federal jurisdiction — a move some observers welcome as a first step in a wide range of urgently needed pension reforms that could happen over the next while.

In fact, federal Finance Minister Jim Flaherty — who introduced changes in late October that aim to increase the allowable pension surplus applicable to both federally and provincially regulated defined-benefit plans, among other things — has apparently hinted that there’s more to come.

Further developments could come as early as mid-December, when federal and provincial finance ministers will meet in Whitehorse to discuss the retirement income system and receive the report of a joint federal/provincial research working group on pension coverage and retirement income that has been operating out of the University of Calgary.

At this point, no one knows for sure what the agenda is, says Ian Markham, director of pension innovation with Watson Wyatt Canada in Toronto. He suggests it will likely include some kind of supplementary pension plan to top up the Canada Pension Plan. And he expects to see changes implemented in the near future — although, he says, “the jury is still out” on the possible impact of the proposed changes to federally regulated plans.

Just what Ottawa is prepared to do to shore up the retirement income system remains to be seen. The Cana-dian Institute of Actuaries, for instance, says Flaherty, “needs to dig deeper into the elements that will strengthen the legislative framework to solve fundamental pension problems and secure benefits for plan members.”

On the other hand, the Assoc-iation for Canadian Pension Man-agement, an industry association representing pension plan providers, is praising Flaherty’s “leadership,” which the ACPM says “will encourage the kind of pan-Canadian discussion required to provide federal-provincial solutions.” Says Scott Perkin, the ACPM’s president: “There is no simple easy fix, but it is possible.”

Meanwhile, the three westernmost provinces may be quietly getting on with the task. Alberta, British Columbia and Saskatchewan are apparently still working on some version of the “ABC Plan” — a proposal unveiled in June that came out of the joint Alberta/B.C. expert panel on pension standards. Markham says Nova Scotia may also be involved.

Designed as a supplement to the Canada Pension Plan, the ABC Plan would probably be administered by an institution, such as a pension society, and would be a defined-contribution plan for workers without a workplace pension — likely with automatic enrolment and the choice of opting out. Contribution levels might be flexible and the range of investment options limited, but there would be no benefit guarantee. Word has it that the three western provinces will go ahead with their proposed plan if nothing happens at the national level.

Pension consultant Greg Hurst, a principal with human resources consultancy Morneau Sobeco in Vancouver, believes the proposed ABC Plan would be a good start to address the coverage issue. (Only 38% of Canadian employees belong to a workplace pension plan). Says Hurst: “Seventy-five per cent of the people who don’t have a pension plan would gain access to one through something like the ABC Plan. [And] there’s the political will in Western Canada now to move forward with it. If it’s executed effectively and well, it may well be that other provinces will start jumping on board.”

But calls for a pension summit — which Hurst dismisses as “the political flavour of the month” — have so far gone unanswered. Provincial premiers have called on the federal government to host a national summit on retirement income by 2010 that would “bring together provinces and territories, the federal government and interested stakeholders and experts to discuss possible options to improve saving options for Canadians and to encourage greater savings.” To date, there has been no reaction from Ottawa.

Federal pension legislation covers only about 7% of pension plans in Canada, and there seems to be general agreement that the proposed changes will have little immediate impact on pension security for the majority of Canadians.

“We need comprehensive reform to protect and improve the pensions of all Canadians,” says Ken Georgetti, president of the Canadian Labour Congress. “These changes result from consultations the government has held over the past year. And some of them look good, but they don’t deal with the pension crisis facing most Canadians. The Conservative government has yet to make its intentions known on this. We want a national summit bringing together governments and other stakeholders to seek consensus on where to go from here.”

@page_break@The federal proposals will restrict an employer’s ability to take a contribution holiday unless a 5% cushion remains in the pension fund; the proposals also will change the solvency funding methodology to make it less volatile and less cyclical by basing the funding requirements on a three-year average; and the proposals will require employers to fund pension benefits fully on plan termination. (At present, only 80% of benefits are required to be funded at plan termination.)

The proposed regime is not really what pension plan sponsors were expecting, Markham says, adding that the key may be in the transition rules — how plan sponsors move from the existing system to the new one — but these have not yet been worked out.

Although these changes will apply to federally regulated pension plans, Ottawa also intends to increase the allowable pension surplus under the Income Tax Act, which applies to both federally and provincially regulated DB plans, to 25% of a plan’s assets from 10%.

But, the CIA says, “It is doubtful plan sponsors will take advantage of this opportunity unless there is a mechanism in place that would enable sponsors to have greater access to funds not needed once adequate benefit security is provided. If the federal proposals had included legislation that would allow employers to set up 100% employer-funded pension security trusts, separate from but complementary to the regular DB pension fund, plan sponsors would have been encouraged to fund their plans above minimum levels, thereby improving the security of benefits for pensioners and plan members.”

Additional contributions needed to fund solvency deficiencies would go into this PST and be released back to the employer if a subsequent solvency valuation showed additional funds were no longer needed for the funding of the DB plan.

Meanwhile, the CIA released a 10-point action plan in early November calling for a “retooling of Canada’s ailing pension system now, and for the future.” Unlike most of the other reform proposals now being considered, the actuaries’ association says Canadians need DB plans: “For DB plan members, retirement income is more predictable, and this facilitates better retirement planning. As well, DB plans help to insulate members from the risks associated with longevity, low interest rates and market volatility.”

The CIA says these DB-style plans could take the form of target benefit plans. According to actuary Ian Edelist, a principal with Eckler Ltd. in Toronto and a volunteer with the CIA, the key to these plans is “risk pooling.” TB plans combine features of DB and DC plans: the plan sponsor makes a contribution, the funds are commingled and the worker is told what benefit to expect, which is a target and not a guarantee.

“We haven’t had meaningful pension reform for more than 20 years,” says Edelist. “My Christmas wish is that the politicians don’t just simply tweak legislation but take the opportunity to understand the issues and create a framework that encourages not only pension plans but retirement savings in general. People are looking to the federal government to take the lead.”

That’s why Edelist favours a pension summit. That said, the biggest change that needs to happen, he stresses, is that “people need to start saving.”

Meanwhile, Peter Tzanetakis, vice president of regulatory affairs with Advocis, says more needs to be done to encourage small and medium-sized enterprises to set up pension plans, as “Canada is in the middle of a major pension crisis.”

Contrary to the CIA’s emphasis on DB pension plans, Advocis says, public policy should focus on DC plans. To date, public policy has concentrated its efforts on examining DB plans; instead, governments should consider mandatory coverage of DC plans as the default option, with opting-out provisions.

And simplicity and transparency for DC plans should be fostered by having a limited range of investment options for most members, reducing risk with age-adjusted balanced portfolios that become more conservative as the plan member approaches retirement age. (Both mandatory coverage with opting out and a limited range of investment choices are features of the ABC Plan.)

But there’s not just one fix to solve this massive problem, says Tzanetakis: “We need to look at a wide range of tools and policy options. The longer it takes to come up with an overall strategy to improve the situation, the more critical it will get.”

Adds Edelist: “The aging of society and the experiences of people who are pensioners exerting political pressure, along with pressure from the media, will do the most to get us through pension reform.” IE