 |
|
|
| The Regulation of Workplace Pensions By Louis Erlichman Canadian Research Director |
| Up to about 1948, most workplace pension arrangements in Canada were funded through either federal government or life insurance company annuities. From 1948 on, there was a rapid growth in the coverage of trusteed pension plans, and by the early 1960’s, the membership of trusteed plans was more than double the membership of group annuity plans. Overall, pension plan membership grew rapidly in the 1950’s,1960’s and 1970’s, leveling off and actually declining over the last two decades as a proportion of the total workforce. While pension plan coverage at any given time has never reached 50% of the workforce, workplace pensions play a significant role in providing income to seniors, particularly in raising those with workplace pension income above the poverty or near-poverty levels provided by the public system. While there have been a significant number of plan conversions from a defined benefit to a defined contribution basis in recent years, in 1999 over 85% of plan members were still in defined benefit plans. Over three-quarters of plan members were in large plans, that is, plans with over one thousand members. I believe that the recent shrinking of coverage is attributable to structural factors in the workforce – basically a decline in the relative importance of groups more likely to be pension plan members – unionized workers, the public sector, full-time workers – rather than a reflection of declining worker interest in pension coverage. Pension plan membership is not randomly distributed in the workforce. Unionized workers and public sector workers are far more likely to be plan members than other workers. In fact, the majority of registered pension plan members in this country are covered by unionized agreements. Far from being voluntary expressions of paternal employer concern, (as is sometimes suggested as an argument against improving minimum standards), pension plans in Canada a largely a union-won contractual benefit. The general regulatory framework for workplace pensions was largely put into place in the 1960’s, though it continues to undergo continual change. The Income Tax limitations on tax-sheltering for registered pension plans (basically 2% per year of service to a $60,000 maximum annual pension) have not changed significantly for decades, though a system to create an overall limit for tax-sheltered RPPs and RRSPs was introduced at the end of the 1980’s, largely as a response to the small business lobby for expanded RRSP contribution room. As incomes have risen, we have heard increasing complaints that the overall limit on tax-sheltered retirement savings, which was supposed to be indexed as part of the reform package a decade ago, is too low and should increase. While this is primarily an issue for higher-income earners, many of our higher paid union members are now bumping up against these limits. Should we be providing extra tax deferral which benefits only a minority of higher income people, when our public benefits still leave a significant number of seniors below the poverty line? The Income Tax Act also limits the share of registered funds which can be invested outside of Canada, which has now been raised to 30%. In spite of arguments that international investment is essential for diversification and enhanced returns, the question is whether we should be providing tax relief to investment which takes money (and presumably jobs) out of the country. Most of our regulatory attention focuses on pension standards legislation. Since pensions, like labour relations, fall under provincial jurisdiction, there are eleven different regulatory regimes in this country. Starting with Ontario’s Pension Benefits Act in 1965, the various jurisdictions have successively introduced and amended their legislation. Standards legislation did not come into force in British Columbia and New Brunswick until the 1990s, and Prince Edward Island still lacks pension standards, since its legislation, while passed, has yet to be proclaimed. While generally similar, the legislation in each jurisdiction is significantly different and they don’t seem to be moving any closer together. While there are reciprocal agreements which allow a multiple-jurisdiction plan to be registered and regulated by a single regulator, each plan must meet the minimum standards provided for by the legislation for each plan member’s own jurisdiction. According to the Leco decision, this requirement can extend to procedural as well as standards issues. CAPSA, the national council of Regulators, under pressure from employers complaining of high compliance costs, has been working on a model law, and is talking about ultimately moving to a single pension standards law so that multi-jurisdictional plans have to deal with only a single set of rules. Given the continuing reluctance of the various political authorities to cede jurisdiction, and the continuing flow of legislative changes moving in different directions in different jurisdictions, it is hard to foresee common legislation within decades. The lack of uniform legislation not necessarily a bad thing. The employer push for a common piece of legislation could imply freezing standards at the lowest current common denominator. Having different pension legislation allows some jurisdictions to take the lead in introducing innovations. While employers claim that the heavy regulatory burden is stifling the growth of pension coverage and contributing to conversions from defined benefit to defined contribution plans, I don’t believe that these costs are the major factor limited expanded coverage. Lowering standards will certainly not make private sector non-union employers any more amenable to introducing defined benefit pension plans. While overheads are a significant problem for registered pension plans for small and medium-sized groups (though multi-employer plans are an important option), most regulatory changes – shorter vesting, portability and survivor benefit requirements – have simply provided basic fairness to plan members. Without fairness, and the perception of fairness, you will not maintain the support of younger member for plan participation and improvement. Since this panel is about where we are and where we want to go on pension regulation, I thought it would be a good idea to look at how far we have come. I dug out of my files the 1978 CLC submission to the Ontario Royal Commission on Pensions and went down the list of our proposals for regulatory reforms. The list was not very long – we were focused on improving the Q/CPP - but it is interesting to see what we were looking for twenty years ago and what we have achieved to date. 1. Coverage after one year of service - the current requirement is now generally two years 2. Vesting after age 30 or 5 years – two-year vesting is almost universal 3. Interest on contributions to be based on Major Bank savings rates – Bank 5-year deposit rates are almost universal 4. Portability and Locking-in of vested benefits – generally the rule, though not through a public agency 5. Plan amendments only with union consent – not a legislated requirement 6. Equal union representation on boards of trustees or administrative committees – while we generally have legislated requirements for members participation on advisory committees, true joint trusteeship and control is still largely restricted to MEPs, though union trusteeship has expanded significantly in the public sector in recent years. 7. Full access to plan information – this is generally the law 8. No limits on negotiating mandatory retirement – still true in most jurisdictions 9. Indexing – no legislated requirement. Ontario and Nova Scotia never followed up on the provisions which were passed. On the whole, I would have to say we did better getting improvements in standards legislation than we did in getting improved public benefits. We have also had other improvements which were not on the list, notably mandatory survivor benefits and minimum employer contributions. The amendments to most standards legislation in the late 1980’s requiring earlier vesting, portability, and survivor benefits, were important in making plans fairer to members. They also simplified our pension negotiations, by largely removing those items from the bargaining table. Legislated indexing requirements, a very big issue in the 1970s and 1980s, have virtually disappeared from view during the low-inflation 1990’s, though groups with negotiated inflation provisions, like the airlines and the paper industry, have generally maintained them. Presumably, a future surge in inflation will bring the indexing issue back to the active agenda. Progress on the issue of surplus ownership owes more to the courts than legislation. Subsequent to the Dominion Stores and Schmidt cases, most jurisdictions have put in place procedures for negotiating surplus-sharing deals, though the TechSyn case in Ontario is only one indication that the surplus ownership issue remains a legal swamp. Unfortunately, the federal government went against the direction of even its own standards legislation in unilaterally scooping up the surplus from its Superannuation plan. It is not clear to me whether Bill 102 in Quebec will have the desired effect of clearing up Quebec’s anomalous legal situation with respect to contribution holidays. Legislative change continues. The recently-passed Quebec Bill 102 has made the most dramatic moves in the last few years . Immediate vesting and partial indexing for deferred vested benefits will make plans more attractive to younger and typically more mobile members. It will be interesting to see if other jurisdictions will follow Quebec’s lead. The reform wave of the late 1980s introduced the requirement (which we had called for) to lock in vested benefits, as a way of insuring that mobile employees would build up, over the course of their working-life, a retirement nest-egg. Ontario has recently introduced provisions which allow unlocking in specified cases of "hardship" and shortened life expectancy. This change contradicts the basic premise of the lock-in. Even more disturbing, it is easy to see the Ontario government moving towards requiring welfare recipients to liquidate all of their retirement assets, even though this is currently prohibited. Other jurisdictions have shown little inclination to follow Ontario’s lead on the wind-up "grow-in" provisions (except Nova Scotia), or the Pension Benefits Guarantee Fund. I am not a strong believer in the PBGF, as it seems to me that in many of the PBGF cases I have seen, most of the money from the fund ended up in the pockets of consultants, lawyers and bankruptcy trustees, rather than plan members. Quebec and Alberta have introduced provisions allowing for phased retirement, allowing members to start drawing a partial benefit while still working part-time. Unfortunately, this can reduce the level of benefit payable at full retirement, so it is unlikely to replace improvements to early retirement benefits. Other jurisdictions have not yet followed Quebec’s lead in requiring annual membership meetings and a more formal role for a pension committee. As far as I can tell, these rules have not significantly increased the role or input of plan members in plan governance, since Committees are still invariably controlled by a majority of employer-nominated members. In addition, the various jurisdictions are putting into their legislation the court-mandated recognition of same-sex spouses. The last piece of legislation I want to talk about is the federal government’s proposal for more stringent rules on solvency funding, which has so far been held off by widespread opposition. They propose to prohibit plan amendments which would reduce a plan’s solvency funding ratio below 90%. Solvency valuations are very sensitive to current interest rates and financial market conditions and hence very volatile. The proposed rule would seriously restrict the flexibility of safe and well-funded plans to make improvements. It would make it particularly difficult to upgrade flat benefit plans to simply keep pace with inflation. This heavy-handed rule is an indication of a more general trend on the part of pension regulators to back away from a broad role as a protector of plan members, and focus instead on limited questions of financial solvency. Regulators simply want to reduce the risk of a politically-unpleasant pension plan failure, whatever the overall impact on pension plans and retirement incomes. The federal regulator is particularly prejudiced against union-trusteed multi-employer plans, which, they feel, are prone to imprudent decisions. Not only are standards different between jurisdictions, but pension regulation is institutionally is all over the map. In some jurisdictions, the regulator is part of a government department. In others, the regulator is in a separate agency, which, in some cases, also regulates other sectors, like insurance companies. In Ontario, FSCO, the regulator, is being merged with the Ontario Securities Commission, creating the risk that the priority of pension regulation will drop even lower, in relation to the higher-profile securities regulators. In Ontario, decisions of the regulator can be appealed to a separate Tribunal. In most other jurisdictions, initial appeals are made to internal government entities or to the Courts. There is a kind of unannounced deregulation going on in the pension field, as regulators use the limited resources as a justification for moving towards what they are calling "self-regulation". This is reflected in various legislative provisions where certification by a plan sponsor, or their actuaries and lawyers, that they are meeting the terms of the legislation replaces an explicit requirement for the regulator’s approval. In the light of the actuaries’ and lawyers’ inherently conflicted role as advisors to plan sponsors, this could be problematic. In fact, the change is not really dramatic as it might seem, since there have always been limits to the resources and the will of the regulator. Particularly prior to the Dominion Stores decision in 1986, which made explicit the regulator’s responsibility to act as a trustee with respect to the interests of plan members, most regulators were unapologetically captive to the "industry" – the sponsor/consultant world that much of the regulatory staff either came from or were going to. This trend towards self-regulation means that we have to be concerned not only with the legislation but who is actually ensuring that the provisions of the legislation are met. If the regulator is backing away, then the onus is increasingly on plan members and their unions to ensure that plans meet legal requirements, and also that plans are administered in conformity with the plan text. The lack of regular auditing of most pension plan operations (beyond an annual financial audit) is a problem. Plan members rarely are in a position to detect an error in a pension calculation, let alone to determine whether they are being dealt with in accordance with the law and the rules of the plan. In general, the decline in public regulatory activity means an increase in the responsibility of plan members and unions, particularly pension committee members and trustees. It highlights the need for union-centred pension education, and ongoing support for pension activists. Viewing pension plans as just another financial intermediary has lead regulators to focus on fund investment and "governance" issues, as if self-assessed governance guidelines can take the place of serious regulatory activity. The suspicious attitude of some regulators towards union-run plans and union trustees is particularly disturbing, when they generally look benignly on the employer’s inherent conflict of interest as both employer and trustee/administrator of single employer plans. So, to come back to the initial question, what are the regulatory issues we are still looking at? 1. Indexing: why not now, before inflation takes off again? Quebec’s breakthrough for deferred vested members is an important step. 2. Surplus: can Plan members get a stronger legal hand? 3. Regulatory Institutions – do unions want an explicit role within the regulatory process, with something like a labour board model? 4. Governance – do we want mandatory joint trusteeship requirements? How do you balance the legal requirements for trustees with the role of the union and collective bargaining? How can we support union trustees and make them more effective? 5. Valuations – do we want anything to be done to the rules? Are requirements stringent enough or too stringent? Will changes make plan improvements harder to negotiate? Can we make actuaries more responsible to plan members? 6. Investment Issues – what about the "prudent person" rules? What legislative changes are required to facilitate ethical and other directed investments? What about foreign investment rules? There is a lot of money and power at stake. In 1998, there was $440 billion in trusteed pension funds. 7. MEPPs – the only alternative to group RRSPs for small and medium-sized groups. How can they be facilitated? |
|
|
|
|
|
