The federal government’s recently launched review of private pension legislation is getting mixed reviews from industry watchers. Although the review seeks to address a wide range of pension issues — some brought to the surface by the economic downturn— its scope is too limited to inspire meaningful change, critics say.

In early January, Ottawa released a discussion paper outlining numerous proposed changes to the legislative and regulatory framework for private pensions under federal jurisdiction. It is seeking written feedback from the public by March 16 and will further gauge public opinion on a national tour of consultations that runs from March 13 to April 17.

The proposed changes relate to both defined benefit and defined contribution plans that are subject to the Pension Benefits Standards Act, which include those in such sectors as banking, telecommunications and inter-provincial transportation. The plans covered represent 7% of all private pension plans in Canada.

By addressing specific issues related to the plans, the proposals seek to “strengthen the security of pension plan benefits and ensure that the framework is balanced and appropriate,” according to Finance Minister Jim Flaherty.

Specifically, the paper addresses issues related to DB plans, such as solvency measurement and funding rules, partial termination, full funding on voluntary plan termination, disclosure requirements and contribution holidays. With respect to DC plans, the paper considers such matters as including safe harbour protection, the payment of variable retirement benefits, the appropriate use of surplus monies and others.

The paper also reviews pension investment rules and explores the possibility of making the PBSA more flexible to accommodate alternative plan designs.

Many of these are important issues to address, according to industry followers — particularly at a time when many Canadians have lost confidence in the safety of their investments. But critics say the proposals fail to address the larger problems at the core of Canada’s pension system. The vast lack of coverage for private-sector employees is the most significant criticism of the system, according to Keith Ambachtsheer, director of the University of Toronto’s Rotman International Centre for Pension Management.

“It’s fine to fix the pension plans we’ve got, but what people seem to forget is that they only relate to 20% of the private-sector workforce,” Ambachtsheer says. “That’s our primary pension issue.”

According to a 2008 report that Ambachtsheer authored, roughly 3.5 million Canadian workers are not members of workplace pension plans and are not accumulating sufficient retirement savings to maintain a decent standard of living in retirement. He calls for major reform of private pensions and the adoption of a system that would automatically enrol all private-sector Canadian workers in a supplementary pension plan, with an option to opt out.

“The Canada Supplementary Pension Plan would very likely produce materially better pension outcomes for millions of Canadian households,” Ambachtsheer’s report says.

Meanwhile, Toronto-based global human resources consulting firm Towers Perrin points to Canada’s system of multiple regulators as the key problem underlying pensions.

The existence of 11 different legislative bodies increases the cost and administrative burden of providing pensions, according to the firm. Although the federal review is useful in updating regulations, its failure to address this issue means it’s unlikely to inspire significant change, says Towers Perrin partner Steve Bonnar.

“What would be really useful is to have an effective debate around reducing the number of laws that are basically the same, but have minor differences, all across the country,” he says.

Still, Bonnar is encouraged by several of the legislative changes proposed in the government’s discussion paper. Solvency funding rules, for instance, represent one of the most important issues facing pensions right now, he says. This has been reflected by recent government measures to provide pensions with temporary relief in this area.

“If you need to provide temporary contribution relief twice in a decade, the solution isn’t to continue to provide temporary relief, it’s to fix the underlying problem,” Bonnar says.

The discussion paper notes that the requirement to fund on a solvency basis is important in enhancing benefit security for plan members, but that it can, under certain economic and financial conditions, put significant strain on plan sponsors’ resources. The paper also acknowledges that the requirements are relatively sensitive to changes in interest rates and the market value of pension assets, which can make it difficult for plan sponsors to establish a stable level of funding for their pension plans.

@page_break@“The government is interested in examining whether adjustments should be made that would be consistent with the objective of enhancing benefit security, but also provide a more stable funding framework,” the paper states.

Enhancing the flexibility of the PBSA to accommodate alternative plan designs is another area in which the industry would welcome change, Bonnar says. In particular, such flexibility could offer greater accommodation for target benefit plans and hybrid plan designs. “That would be a useful addition,” he says.

On the issue of pension investment rules, the discussion paper lacks specific proposals, but indicates that the government is open to new ways of improving the regulatory framework. Although the framework has moved toward a more flexible principles-based approach in recent years, several quantitative rules remain in place.

These remaining rules should be eliminated, Bonnar says: “There are many different individual plan circumstances — and in my view too many — to have arbitrary rules in place.”

Many others agree. For instance, the C.D. Howe Institute in Toronto recently released a report calling for elimination of the rule that restricts pension plans from holding securities representing more than 30% of the votes to elect the board of directors of a Canadian corporation. The report calls the rule “an impediment to the investment decisions of Canadian pension plan managers,” and a factor putting Canadian plans at a disadvantage relative to foreign competitors.

Furthermore, it argues that pension plans have been able to work around the rule by owning more than 30% of a company without controlling more than 30% of voting rights, which undermines the rationales on which the rule is based. This also increases transaction costs and interferes with “optimal investment management techniques,” the report says.

The government’s discussion paper outlines the existing quantitative rules for pension investment regulation and notes the shift toward prudent person standards that began in the early 1990s. The prudent person standards require that fund administrators invest using the “care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person.”

The C.D. Howe Institute lauds this approach for its recognition that not all funds are alike and for providing fund managers with flexibility to decide which asset mix and investments are most appropriate for the portfolio.

The C.D. Howe Institute is likely to encourage greater reliance on such a principles-based approach during the government’s upcoming consultations.

Beyond their hopes surrounding the specific issues to be addressed in the review, industry watchers are optimistic about the opportunity for industry voices to be heard. “It’s a positive step in the sense that at least they’re going out to talk to people,” Ambachtsheer says. IE