The Department of Finance today launched an online consultation that will look at overhauling the legislation governing federally-regulated defined benefit pension plans.

Finance released a discussion paper outlining the key questions for consideration, “with the aim of maintaining a balance between the interests and incentives of private sector plan sponsors and plan members”. The objective of the paper is to seek views on how to strengthen the legislative and regulatory framework for DB plans, “in order to improve the security of pension plan benefits and ensure the viability of defined benefit pension plans”.

It notes that DB plans have recently had to deal with adverse market conditions, funding deficits, legal rulings creating uncertainty, some lack of clarity regarding pension rights under insolvency and questions regarding the impact of pension accounting rules. This is creating incentives to shift from defined benefit to defined contribution plans, which in general, shifts much of the risk of financing retirement income from the plan sponsor to the plan member.

And, as a result of the challenges facing DB plans, the Office of the Superintendent of Financial Institutions has stepped up its efforts to more proactively identify plans that pose higher levels of risk and ensure that plan administrators take prompt corrective action where needed. It notes that about half of the DB plans that OSFI regulates currently have solvency funding deficits, although almost all are actively funding their deficits and the Superintendent has described the current situation “as stable and manageable”.

Issues for discussion include:

  • providing more certainty about surplus distribution and how to improve incentives for plan sponsors to help fund their plans beyond the minimum requirements;
  • improving the dispute settlement mechanism; whether the legislation should allow partial plan termination;
  • providing more flexibility for plan sponsors to fund their plans, including the use of alternative financial vehicles such as letters of credit;
  • extending the amortization period for solvency funding;
  • whether there are alternatives to address funding issues other than relaxing funding requirements;
  • whether there should be greater disclosure provided to plan members regarding a plan sponsor’s financial condition, funding decisions and contribution holidays and how this may be done; and
  • the possibility of creating a federal pension guarantee fund.

Comments are due September 15.