SHARE LEGISLATIVE UPDATE Winnipeg, Manitoba November 5, 2013

Transcription

1 SHARE LEGISLATIVE UPDATE Winnipeg, Manitoba November 5, 2013 Murray Gold, Partner Queen Street West, Toronto, ON M5H 3R3 Tel: ; Fax:

2 Agenda Items Prepared Comments New Brunswick s Shared Risk Pension ( SRP ) model: Legal aspects and strategic challenges. Regulatory and Case Law Update: Pressures on plan funding and plan design; Fiduciary obligations of governments in regard to single employer public sector plans; Leading cases. 2

3 General The solvency funding rules are driving pension funding costs to unprecedented levels; Increased political focus on pensions, especially public sector defined benefit ( db ) plans; Employer focus on avoiding cash and accounting costs associated with db underfunding; 3

4 General Increasing view that employees are responsible for their own retirement incomes, i.e. wage to be divided between current and future earnings; Combined political and economic pressures undermining db plans in favour of target benefit plans and shared risk plans; 4

5 General Increased tendency to restrict collective bargaining concerning pensions, either through constraints (i.e. contribution caps) or incentives (i.e. solvency relief n exchange for benefit reductions). 5

6 New Brunswick SRP Model Achieves defined contribution ( dc ) treatment for employer pension expense; Eliminates employer obligation to fund unfunded liabilities or solvency deficiencies; Constrains collective bargaining; Mandates entirely new governance and regulatory processes; Converts all accrued (including retiree) benefits into target benefits. 6

7 New Brunswick SRP Model Initial unfunded liabilities: Reduction/elimination of non-vested ancillary benefits (early retirement and indexation); Freeze accrued final average benefit; Future benefits = career average; Commuted value entitlements reduced; Accrued benefits become target benefits; More conservative actuarial assumptions; Higher contributions. 7

8 New Brunswick SRP Model Introduces benefit security distinctions between base and ancillary benefits: Base benefits are formula benefits payable for the lifetime of the member only; Ancillary benefits include spousal benefits, guarantee periods, early retirement and indexation; 8

9 New Brunswick SRP Model Base benefits (formula plus vested ancillaries) to be protected to a 97.5% level of certainty ; Ancillary benefits to be protected to a 75% level of certainty ; Benefit security to be assessed through stochastic modeling, at least 2000 projections, over 20 years; Models and assumptions not publicly available; New regulatory structure required; 9

10 New Brunswick SRP Model PBA funding regulation is replaced by Plan specific Funding Policy ; Contributions cannot increase by more than 2% of payroll, or 25% of the initial contribution rate; 10

11 New Brunswick SRP Model Initial contribution rate may be recalculated only if there is a permanent benefit change; Superintendent approval required if resulting contribution exceeds the Funding Policy limit (section 9(12) of SRP Regulations). 11

12 New Brunswick SRP Model Funding deficit recovery plan Triggered by two successive valuations of less than 100% (going concern, open group); Steps controlled by Funding Policy, Regulations; Contribution increases only up to the cumulative limits in section 9(a); 12

13 New Brunswick SRP Model Reduction/removal of non-vested ancillary benefits; Reduction of future base benefits (up to 5%); Reduce past and future base benefits pro rata (target 105% funded). 13

14 New Brunswick SRP Model Funding excess utilization plan: Funded ratio of at least 105%; Regulations permit use of 20% of surplus between 105% and 140%, except superintendent may relieve; First priority reverse past and future base benefit reductions; Second priority reverse past and future ancillary benefit reduction; Third priority reverse reductions made on conversion from db to SRP; Finally, funding policy objectives. 14

15 New Brunswick SRP Model Investment policy: Must be inter-dependent with plan liabilities and expected future cash-flow; Expected to mandate more conservative asset allocations than current allocations. 15

16 New Brunswick SRP Model Disclosure requirements: Limit on contribution; Past and future base and ancillary benefits may be reduced; Current funded ratios; Summary of benefits; Factors considered in benefit reduction. 16

17 New Brunswick SRP Model Summary - Radical change to db program: Conversion of accrued benefits; Significant reduction of ancillary liabilities and future benefit obligations at conversion; Removal of employer covenant; Benefit security governed by actuarial modeling and promise of regulatory oversight; Regulatory constraints on funding policies and contribution increases. 17

18 Alberta MEPP Funding Proposal Going Concern Plus : Discussion paper from Alberta Treasury dated March 11, 2013; Proposal for collectively bargained multiemployer plans ; Proposals to implement recommendations of Joint Expert Panel on Pension Standards (JEPPs); Eliminate solvency funding, but replace with going concern plus. 18

19 Going Concern Plus Key elements: Best estimate going concern assumptions; PfAD: Balance benefit security against contingent nature of benefit regulatory balance; PfAD is plan specific; PfAD is countercyclical; PfAD funded by positive experience. 19

20 Going Concern Plus PfAD objective: Probability of 85% or more that plan be 100% funded at next valuation (3 years). PfAD variables: Asset allocation; Interest rate as compared to Benchmark Interest Rate. PfAD Offsets: excess contributions, smoothing reserves. 20

21 Going Concern Plus Asset Allocation: higher PfAD for higher equity allocations; Discount Rate: higher PfAD if interest rate exceeds Benchmark Discount Rate (5.52% at Dec 31, 2012). 21

22 Going Concern Plus Benefit improvements: Not permitted unless, after benefit improvement+pfad, plan has buffer of 5%; Certain benefit formulae not permitted 22

23 Going Concern Plus Additional rules regarding: Reduction of future/accrued benefits; Termination benefits; Amortization of unfunded liabilities; Stress testing; Disclosure to members; Conversion from DB to collectively bargained multi-employer pension plans. 23

24 Going Concern Plus Like NB: Benefit security based on actuarial model: PfAD sensitive to market interest rates, asset allocation; Permits conversion of DB to cbmep, including for accrued benefits; Reduced termination benefits; Mandatory 5% buffer before benefit improvements; Increased disclosure to members; (Probably) more detailed regulatory oversight than at present. 24

25 Unlike NB: Going Concern Plus No caps on contributions; Shorter benefit security projection period; Simple prescribed methodology for determining PfAD; Less intrusive regarding surpluses and deficiencies. 25

26 Fiduciary Duties Single Employer Public Sector Plans Three recent cases limit the extent of fiduciary obligations owed by the Crown vis-a-vis public sector plans: Elder Advocates of Alberta Society v. Alberta 2011 SCC 24 (Canlii); Professional Institute of the Public Service of Canada v. Canada (Attorney General) 2012 SCJ No 71; May v. Government of Saskatchewan, 2013 SKCA 11 (Canlii). 26

27 Fiduciary Duties Single Employer Public Sector Plans These cases: Hold that imposing fiduciary duties to a single group may conflict with the Crown s broader responsibility to balance competing social interests; Hold that, outside the classic (per se) instances of fiduciary obligation, it will be exceptional to impose ad hoc fiduciary duties on the Crown. 27

28 Fiduciary Duties Intergenerational Considerations Chapman v. Benefit Plan Administrators, 2013 ONSC 3318: Class action alleging negligence and breach of trust and fiduciary obligation against Trustees and actuarial advisors for consenting to early retirement benefits that resulted in the depletion of the pension fund and the reduction of benefits overall. Certified as a class proceeding against the trustees, administrator and actuary. 28

29 Labour Relations Remedies Fredicton (City) v. FPA, Local 91, 2012 NBQB 363: In 2010/11, City initiates a consultation process in connection with a deficit in its multi-union civic plan (created by by-law); Cuts proposed (March 29, 2011) the day before police union gives notice to bargain; LRB subsequently (Sept 2011) issues an order requireing parties to consult, employer to re-attend if no agreement; Court upholds LRB Order, finds City interfered in the administration of the Union. 29

30 Post-Retirement Benefits O Neill v. General Motors of Canada, 2012 ONSC 4654: GM unilaterally changes post-retirement benefits for salaried retirees; Plan documentation gave employer the right to amend, modify, suspend or terminate any of its programs (including benefits) ; Court holds this ROR clause does not allow employer to reduce benefits once the employee is retired; Notice of appeal filed August 2,

31 Post-Retirement Benefits Lacey v. Weyerhaeuser Company Ltd BCCA 252 (Canlii): Weyerhaeuser unilaterally reduces post retirement benefits to salaried retirees; Trial Judge finds that W and its predecessor McMillan Bloedel, promised post-retirement as non-gratuitous elements of overall compensation and was obliged to continue making payments. British Columbia Court of Appeal affirms. 31

32 Conversions Hard vs. Soft Freeze In converting DB to DC, or FA DB to CA DB, is the accrued benefit calculated with reference to (a) final average earnings to the date of retirement, or (b) final average earnings as an employee (including post-conversion earnings)? ROMCA, 2013 ONFST 9: hard freeze. Halliburton, : soft freeze. 32