Uniformity: Let’s Catch The Tide
By: Mark Campbell & Priscilla Healy
There is a tide in the affairs of men, Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life Is bound in shallows and miseries. – Shakespeare’s Julius Caesar
Pension plan sponsors have been “bound in the shallows and miseries” of non-uniform pension legislation for decades. However, a new tide is rising in the form of Proposed Regulatory Principles for a Model Law, recently released by the Canadian Association of Pension Supervisory Authorities (CAPSA). These principles have been incubating for years while CAPSA members struggled to reach agreement.
The task was further complicated by changing faces on the pension regulatory scene and the turnover of governments and of ministers responsible for pensions. There has also been the spectre of adverse public reaction to any substantive pension reform in certain key areas (witness Bill 198 in Ontario). The CAPSA model law principles represent a remarkable achievement by the pension regulators. If adopted, the principles reflect a balanced approach to pension laws, by which we mean an approach that will undoubtedly be criticized by most stakeholders on one basis or another. Nonetheless, the principles would go far to remove the current irritants in pension legislation that make the administration of most pension plans both clumsy and costly.
CAPSA is floating a proposal to mandate Quebec-style pension committees for all plans (under Quebec law, plans with Quebec members must be administered by pension committees including at least two plan members plus an external appointee). The principles recommend inclusion of at least two plan members and are silent about external appointees. Member involvement in pension plan governance may be an idea whose time is coming, not only in Quebec but across Canada. This involvement need not undermine the plan sponsor’s right to determine either benefits or funding. We encourage sponsors to think carefully about rejecting the principles on this basis, as this particular principle may be necessary to keep Quebec on board.
The pension regulatory system would benefit from common rules regarding the withdrawal of surplus from both wound-up and ongoing plans. The principles call for two-thirds member consent for surplus to be paid to the employer. This is now the most common legislative requirement in the various Canadian jurisdictions. Member consent would be required for payment of surplus to the employer, whether or not the plan confers legal entitlement on the employer. The principles eliminate the need for costly and often uncertain legal opinions as to surplus ownership and address the troublesome requirement in some jurisdictions to obtain two-thirds consent from inactive members. These members are often difficult to locate or can disproportionately affect the outcome.
CAPSA firmly endorses the ‘final location’ principle, which is the determination of a member’s rights and benefits according to the laws of the jurisdiction of employment at the time of retirement, termination, or death as the case may be. This is in contrast to ‘checkerboarding,’ where benefits would be governed with respect to various periods by the laws of the various jurisdictions where benefits may have been earned. The impracticality of ‘checkerboarding’ had the potential to sink the entire pension system.
The pension system would also benefit from the proposed uniform rules for phased retirement, immediate pension splitting on marriage breakdown, and pre-retirement death benefits
Employees, or their collective bargaining agents, will be unhappy with CAPSA’s proposal to jettison ‘grow-in,’ the rule in Ontario and Nova Scotia that gives members affected by downsizings or business closures the right to early retirement benefits. They will also be unhappy about the elimination of partial plan wind-ups. This would curtail the future effects of any decision by the Supreme Court of Canada in the Monsanto case to require the distribution of surplus on a partial plan wind-up (past partial wind-ups could still be affected). They should, however, be happy with the principle as to surplus, immediate vesting, and pension committees.
Missing At Sea
The principles duck one of the most contentious areas of pension legislation - when should a member be entitled to withdraw the value of his pension benefits on a non-locked-in basis? This is not a labour versus management issue – there are sincerely held and opposite positions held on all aspects of this issue. The principles also do not comprehensively address the difficult area of plan mergers, spin-offs, and conversions. These thorny issues are all considered details and left up to the regulations.
Shipwreck Waiting To Happen
But all this is hypothetical. Before there can be any boon (or bane) from the model law principles, they first have to be adopted as the legislation in all Canadian jurisdictions. And the legislation would have to be very, very similar. The current system shows how an accumulation of numerous, seemingly minor, differences becomes an albatross around the neck of pension plan sponsors.
We are concerned that the model law principles may flounder on the shoals of inconsistent follow-through by both legislators and regulators. As a result of elections and changes in ministers and bureaucrats, every jurisdiction will produce variances to meet its own philosophy and political pressures. For example, Manitoba already seems firmly wedded to its principle of mandatory plan membership; Ontario to the Pension Benefits Guarantee Fund and to grow-in; and Quebec to almost all of its own ‘forward-thinking’ legislation.
We understand that the intention behind the model law principles is to allow the various jurisdictions to keep the provisions they cherish, and the measure of success of the process of preparing and consulting as to the model law principles will be 80 per cent uniformity in common principles. This is probably realistic and may even be palatable to the industry. However, this 80 per cent agreement on common principles can be undermined by purposeful or inadvertent drafting differences. We would urge, therefore, that the Uniform Law Conference be called upon to prepare a model act based upon the agreed principles.
Setting The Sails The time is long overdue to have a single pension regulator in Canada. The Wise Persons Committee recently released a report calling for just such a unified approach to securities regulation. Even a Dimwitted Persons Committee could easily come to the same conclusion for pension regulation.
For starters, every meeting of the pension industry favours uniformity when the subject is raised. Even governments and regulators give at least lip service to uniformity. Perhaps the root problem is that everyone favours uniformity, but only with the rules they prefer!
The direct and indirect costs of non-uniformity are felt by every plan. Multi-jurisdictional plans endure complex administrative requirements, numerous and frequent plan amendments, and member communications that must be tailored for multiple jurisdictions. Actuarial, consulting, and legal costs carry with them the heavy overhead of needing to know the laws of every jurisdiction. And these latter costs are borne by all plans. The Association of Canadian Pension Management has estimated that the costs associated with a lack of uniformity make up as much as 20 per cent of pension administrative costs. Thus, several hundred million dollars are wasted annually since these deadweight costs benefit neither plan members nor sponsors.
Compliance with the laws of different jurisdictions is not only difficult, but in some cases impossible. In its rationale for a model pension law, CAPSA cites the 2000 Leco decision of the Ontario Divisional Court. That decision stated that the laws of the jurisdiction of plan membership apply to the members employed in that jurisdiction. And though it may be convenient and practical to apply the investment, funding, and plan governance laws of the jurisdiction of registration to the plan as a whole, that practice can be challenged. Indeed, it surely will be as soon as a group of plan members sees a substantial benefit in so doing.
Chart 1 shows that pension plan coverage in Canada rose sharply in the 1960s even as relatively benign pension laws were enacted. However, the numerous ‘updates’ to that legislation, particularly in the mid- to late-1980s, appear to have strangled the growth in coverage. Then tax reform and further pension reform in the 1990s contributed to send pension plan coverage into continuous freefall. Of course, not all of the charted changes can be attributed to the ‘dead hand of government.’ But our clients affirm that over-regulation has been a very significant factor.
Indeed, Chart 2 shows that the most activist jurisdictions over the last decade (Quebec, Ontario, and Alberta) have had the greatest declines in pension plan coverage. Employers, particularly those with U.S. ownership, are not sympathetic to Canada’s hodge-podge of pension regulation. They rarely establish new Defined Benefit pension plans and they often prefer to convert DB arrangements to Defined Contribution plans, or even non-pension arrangements.
A Rising Tide Lifts All Boats
We strongly support the call for uniform pension law in Canada. The pension industry should get behind CAPSA’s work towards uniformity, and pressure governments to implement model law principles, once they are agreed upon. This means that all stakeholders will need to accept some compromises to achieve a better overall pension regulatory system.
And CAPSA’s draft model law principles are a good start. Uniform, or even semi-uniform, legislation would be an improvement on the current unsatisfactory state of pension regulation. However, a single pension regulator (see Sidebar) administering a single set of rules is what we really need. The industry, CAPSA, and governments should seriously consider embarking on this voyage.
Mark Campbell is an actuary and principal in the Calgary office of Towers Perrin. Priscilla Healy is a lawyer and retired principal in its Toronto office.
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