I recently wrote about the “pension crisis” and what was needed to improve income protection for Canadian seniors.
While several provinces have been working on new pension rules, it was federal Finance Minister Flaherty who made the first move, with his announcement on October 26 of proposed changes to federal pension legislation.
While there were some positive elements in Flaherty’s announcement, it was far short of what we need. His proposals will have, at best, a small impact on pension security for members of workplace pension plans, and will do nothing about the broader problem of income adequacy for the majority without workplace plans.
To start with the broader issue: Flaherty is proposing no improvements for public pensions – Old Age Security, the Guaranteed Income Supplement and the Canada Pension Plan – that provide most Canadians with almost all their retirement income. Nor is there anything he proposes that would lead to an increase in the coverage of workplace plans.
What Flaherty put forward were primarily changes to the Pension Benefits Standards Act, which governs workplace pensions in the federal sector (airlines, banks, railways, etc. – covering about 10% of pension plan members nationally).
While Flaherty’s announcement placed “Enhanced protections for Plan Members” as its first objective, his proposals will not significantly increase benefit security (and may in some ways decrease it).
First, the good news:
Flaherty would bring the federal law in line with all others in Canada, except Saskatchewan, in requiring a solvent employer to fully-funded an underfunded terminated plan. This is long overdue – it was first promised over 10 years ago by the then-Liberal government, who never followed through.
Employer contribution holidays would also be restricted to situations in which plans had at least a 5% surplus on a solvency basis. While not a huge change, this would be the first limit of any kind on employer contribution holidays.
A requirement for annual actuarial valuations would also make it more difficult for employers to take contribution holidays based on out-of-date information, though it could be a cost issue for smaller plans.
The Income Tax Act is also to be amended so as not to force an employer contribution holiday until a plan is 25% overfunded (vs. 10% currently). This increased flexibility is overdue, but will likely have a limited impact, particularly in the short-term, as most plans are now in a deficit position.
On the other hand, Flaherty would allow employers to base solvency funding on a three year running average of solvency ratios, which could reduce the amounts they have to put into the fund when markets decline.
Even more important, Flaherty proposes nothing new to protect pensions in bankruptcy situations – no pension insurance scheme, and no higher priority for pension plans under bankruptcy legislation.
Another proposal is a restriction on benefit improvements that would put a pension fund’s solvency level below 85%. While this would seem to guard against imprudent pension promises, it is a rigid rule that could make it very difficult to upgrade negotiated flat benefit plans to keep pace with wages and inflation.
Flaherty’s only significant improvement in minimum standards is a requirement for immediate “vesting” (a member’s right to the pension) vs. the current two-year maximum. This provision follows Quebec law. It will still allow pension access to be limited by membership waiting periods of up to two years, and the maximum period before benefits are locked-in period will still remain at two years.
Flaherty announced a number of other changes. Many of these are technical, and hard to judge until the language of legislation is introduced. They will need to be carefully scrutinized to ensure that they make the law better, not worse.
On the key issues of benefit security and decent incomes for all seniors, however, it is clear Flaherty has failed to take the lead.