Pension Regulation in Quebec: What s New? Presentation to the BC Pension Forum Michel Lizée Service aux collectivités (UQAM) CUPE local 1294

Transcription

1 Pension Regulation in Quebec: What s New? Presentation to the BC Pension Forum 2007 Michel Lizée Service aux collectivités (UQAM) CUPE local 1294 Vancouver, May 24 th 2007

2 Outline Quebec s regulatory framework Improved plan governance and greater accountability from service providers Plan funding (solvency): diverging paths for private and for public sector pension plans A new type of pension plan: member-funded pension plan The push towards phased-in retirement

3 Quebec s regulatory framework Quebec Pension Plan, the CPP s twin Similar and portable benefits; same contribution level; different investment approaches (more convergent since late 1990s) Amendements to the QPP in late 1990s led to similar amendments to the CPP (e.g. raising contributions to 9,9% in order to raise the reserve level and ensure long term viability) Pension plan regulation Specific legislation for Government and public sector employees Supplemental Pension Plans Act (1990) Covers private sector as well as municipalities, universities (but NOT the Quebec Governement, school boards, heath care sector) Quebec Pension Board, our regulator, an active participant of CAPSA, where exchanges take place in order to harmonize, when possible, pension regulation across federal and provincial jurisdictions

4 The pension committee as sole administrator and fiduciary 147. Every pension plan shall, from its registration, be administered by a pension committee - SPP Act (1990) Committe must be composed of at least 1 member elected by active participants at the annual plan members meeting (+ 1 non voting) 1 member elected by inactive (i.e. retired, deferred and beneficiaries) participants at the annual plan members meeting (+ 1 non voting) 1 outside independent member In practice, in the private sector, employers designate a majority of committee members, while municipal and university pension plans tend to have a more balanced representation between employers and members Implies that a significant number of union activists, in both the private and the public sector, are pension trustees

5 1 Improved plan governance and greater accountability from service providers

6 The context Expert panel set up by the Regulator in 2005 to assess the governance of pension committees after 15 years of experience since the adoption of the SPP Act in Its report was the basis of part of Bill 30 adopted in December Do the pension trustees have the skills required to perform all their functions as plan administrators in the context of personal fiduciary responsibility? How can the governance of pension committees be improved? Do trustees need guaranteed access to information, especially in cases where the administration of the plan has been delegated back to the employer, a frequent practice in the private sector, where the employers have a majority vote on the pension commitee? Are the duties of service providers (custodians, fund managers, actuaries, etc.) exercised in the sole best interest of plan members?

7 «The sustainability of all categories of pension plans requires that the Law be revised to provide for both better governance practices and stricter risk management. The issue of the trustees personal liability must also be solved if we want the pension committee to survive as an institution.» - (Comité d'experts, 2006, 2)

8 «Safe harbour» rule regarding fiduciary duty: act on the basis on an expert s opinion Limiting personal liability as a trustee by obtaining expert advice and acting upon it: The pension committee is presumed to have acted with prudence where it acted in good faith on the basis of an expert s opinion Every person who makes an investment otherwise than according to law is, by that sole fact and without further proof of wrongdoing, liable for any resulting loss. The members of a pension committee who approved such an investment are, by that sole fact and without further proof of wrongdoing, solidarily liable for any resulting loss. However, such persons incur no liability under this section if they acted in good faith on the basis of an expert s opinion.

9 Trustees right to information The secretary of the pension committee or any other person appointed by the committee provides the committee members with the documents and information needed to administer the pension plan. Committee members have access to all information on the plan and may obtain a copy of any document. However, they may not have access to personal information unless it is required in the performance of their duties Delegatees, representatives and service providers must provide the pension committee with the documents and information they receive from government authorities and that call into question the conformity of the plan or its administration with this Act.

10 Trustee education, a requirement The cost of the professional development of committee members is an administration cost Each pension committee will be required to adopt, before December 2007, «by-laws establishing its rules of operation and governance» and review them regularly, including: (5) the measures to be taken to provide professional development to committee members

11 Each committee must adopt internal by-laws The pension committee may adopt internal by-laws establishing its rules of operation and governance. The committee ensures that they are complied with and reviews them regularly. The internal by-laws determine, in particular, (1) the duties and obligations of the committee members; (2) the rules of ethics to which those persons are subject; (3) the rules governing the appointment of the chair, vice-chair and secretary; (4) the procedure for meetings and the frequency of meetings; (5) the measures to be taken to provide professional development to committee members; (6) the measures to be taken to ensure risk management; (7) internal controls; (8) the books and registers to be kept; (9) the rules to be followed when selecting, remunerating, supervising or evaluating delegatees, representatives or service providers; and (10) the standards that apply to the services rendered by the committee, namely the standards on communicating with plan members and beneficiaries.

12 Increased accountability for service providers The person or body exercising delegated powers shall assume the same obligations and incur the same liability as those the pension committee or one of its members would have had to assume or have incurred if the powers had been exercised by the pension committee. The same applies to service providers and representatives who exercise a discretionary power belonging to the committee. 154 Service providers and representatives who exercise a discretionary power belonging to the pension committee are considered to be delegatees Delegatees, representatives and service providers may not exclude or limit their liability. Any clause to that effect is null. Any clause to that effect in a contract terminated or in effect on 13 December 2006 is null if it is abusive. The abusive nature of such a clause is assessed, with the necessary modifications, with reference to the articles of the Civil Code on consumer contracts and contracts of adhesion.

13 including new whistle-blowing requirements The pension committee selects and hires the delegatees, representatives and service providers Delegatees, representatives and service providers must submit reports on their work to the pension committee. Delegatees, representatives and service providers must report to the pension committee in writing any situation noted in the normal course of their duties that might adversely affect the financial interests of the pension fund and that requires correction. If the pension committee fails to take immediate corrective measures, the delegatee, representative or service provider must send a copy of the report to the Régie. A person who, acting in good faith, sends a report to the committee or the Régie under the second or third paragraph may not be held liable.

14 2 Plan funding (solvency): diverging paths for private and public sector pension plans

15 Defined benefit plans under increasing pressure DB plans are found mainly in the public sector and larger private firms, while DC plans, RRSPs (or no plan) dominate in smaller firms. In recent cases, some DB plans were terminated (construction industry) or closed to new entrants (Bell Canada). However, in other cases, the union successfuly fought the attempt (13-month strike on that issue by CEP workers at a newly acquired Louisiana-Pacific plant in Chambord, some Northshore Steelworkers mining locals). Plan terminations may accelerate once plans are back in surplus on a solvency basis and before the 2010 deadline.

16 Funding: several measures in recent years Temporary measures for the first actuarial valuation after Dec. 30th 2004: Combining of solvency deficits Amortization of solvency liability extended from 5 to 10 years IF Municipality or university OR employer provides a letter of credit OR plan members and beneficiaries consent (through the union; in non union firms, no more than 30% of active and 30% of non active members object) However, benefit improvements for the next 5 years must be funded on the greater of solvency/funding basis. Specific measures for municipal pension plans bankers clause (2003): employer may unilaterally take contribution holidays to get a reimbursement of past solvency amortization payments employer may put non-tradeable municipal bonds in the pension fund, up to certain limits, in lieu of actual payments for solvency deficts (they will be liquidated when the plan is back in surplus)

17 Diverging funding paths for private and public sector plans Recent terminations of private sector plans with insolvent employers led to intense political pressures from affected workers and retirees as well as other groups to avoid the repetition of such terminations and compensate the affected individuals Requiring pension plans to maintain solvency, and therefore obliging each pension plan to fund a provision for adverse deviation, is seen by the governement as the key to improved funding. HOWEVER, in the case of municipal pension plans, as part of a fiscal pact between the provincial and municipal governements, municipal pension plans are no longer required to fund solvency deficits (measure also extended to University pension plans).

18 Annual actuarial valuation required New funding measures to be implemented by 2010 (bill 30) In order to prevent contribution holidays or benefit improvements financed out of past surpluses but no longer existing, an actuarial valuation will be required at the end of each fiscal year. This valuation must be complete at least once every three years, but may be partial if the pension plan is both solvent and funded (a. 118)

19 The provision for adverse deviation (solvency) Presented as a key element of the new act to ensure pension benefit security Level required not known at this point (under review in coordination with ICA) but regulations will be in place by 2010 Example provided: investment policy 60% equity / 40% fixed income will require a 107% solvency threshold Should not need addtionnal contributions but will build itself from favourable experience gains, but no contribution holiday as long as reserve is not full, and contributions to amortize benefit improvements must continue until reserve is full

20 The provision for adverse deviation (cont.) One of the controversial issues in Bill 30 adopted in December Solvency underestimates the expected return of a diversified fund and is a volatile measure (no asset smoothing is allowed in Quebec, discount rates change monthly), and therfore creates undue pressures on the pension plan in terms of the level and volatility of contributions required. During the hearings on Bill 30, employers and their vocal ally, the large actuarial firms, objected to the additional cost for employers (which would accelerate DB plan terminations in their view) and demanded that, given the asymmetry issue, the law clarify that the provision for adverse deviation must revert to the employer in the case of a plan termination The proposed provision for adverse deviation appears to be positive as a tool to the extent it may help to better manage investment policy risk and that it may be sufficiently flexible in order not to add an undue cost on a short term basis to the plan sponsors While allowing such provision, the Act should not require the constitution of such a provision. (FTQ, 2006)

21 The letter of credit as a permanent feature A solvency deficiency may be funded by a letter of credit guaranteed by a financial institution. Global limit: 15% of solvency liabilities Considered as part of the assets (on a solvency basis only) May not be used by an employer belonging to a multiemployer plan Regulations expected on this issue

22 Putting a damper on plan improvements Plan improvements can be financed out of surplus only if the plan is in surplus on a going-concern basis and if the provision for adverse funding is full. Amortization payments to finance a benefit improvement must be continued even once the plan is back in surplus, unless the provision for adverse deviation is also full. If solvency is below 90%, the full cost of the improvement, or at least enough money to bring the solvency ratio back to 90%, must be paid immediately.

23 The requirement for an equitable use of surplus The surplus assets of a pension plan may only be appropriated to the payment of the value of the additional obligations arising from an amendment to the plan in a manner that is equitable for both the group of active members and the group of non-active members and beneficiaries.anyone amending the plan must make sure this requirement is satisfied. In order to ensure equitable treatment, the main elements to be taken into consideration are the evolution of the pension plan, any amendments made to it and the circumstances in which those amendments were made, the origin of the surplus assets concerned, the use made in the past of any surplus assets, the characteristics of the benefits provided for under the plan and the characteristics of the pensions being paid out.

24 The requirement for an equitable use of surplus (cont.) Information about plan improvements financed out of the surplus must be sent by the pension committee to active and inactive plan members Each participant may object in writing.if more than 30% of either the group of active or the group of inactive plan members object, it is presumed that the use of surplus is not equitable. If the employer still goes ahead with the change, participants my go to court to challenge the funding of new benefits out of the surplus and there is a presumption in their favour that the use of the surplus was not equitable Given the Régie s past practice, it should be assumed that pension plans registered in another jurisdiction but who have Quebec participants will have to ensure that the use of surplus for benefit improvements is equitable to Quebec active and inactive plan members

25 The overall assessment of the FTQ regarding Bill 30 «In conclusion, while we strongly support proposals with respect to the governance of pension committees, we think that those with respect to funding, while they are based on the best intentions, will put into question the long term sustainability of defined benefit pension plans... Our members have always appreciated the protection offered by defined benefit pension plans. For lack of a better public plan, these plans are the planning tool for retirement. Replacing them by accumulation plans would be a disaster, not only for older workers, but also for younger workers who are being offered, under biased information, two-tiered systems. In this context, we cannot take the risk that increasing the cost of pension plans might further weaken and erode defined benefit plans.» (FTQ, 2006)

26 Meanwhile, for municipal and university pension plans... At the same time Bill 30 was adopted, a new regulation was enacted exempting municipal and university pension plans from the obligation to amortize solvency deficits Part of the fiscal pact between Quebec and municipalites Key argument: municipalities cannot go bankrupt and have governement backing, therefore solvency is not relevant, besides being unnecessarily costly and volatile Covers multi-employer plans where more than 90% of plan members work for a municipality or university Also applies to the multi-employer pension plan of publicly financed day care centers (CPE)

27 Less impact of solvency on municipal/university plans... As of December 31, 2006, municipal and university pension plans no longer have to amortize solvency deficits. The provision for adverse deviation (solvency) will not apply to them in No contribution holiday is allowed if the plan is not fully funded and solvent at the end of each year. Lump sum payments to members who leave or to beneficiaries may still be paid out, but only in proportion to the degree of solvency of the plan (up to 100%); the balance is payable in the next 5 years

28 but stricter funding rules No asset smoothing allowed: market value of assets must be used; Consolidation of funding deficits is not allowed Although the amortization period for a deficit is normally 15 years, in the case of benefit improvements that are not funded out of the surplus, the deficit resulting from the modification must be amortized in 5 years If solvency < 90%, all of the cost of the improvement, or at least the amount required to bring the solvency back to 90%, must be paid immediately.

29 3 A new type of plan: member-funded pension plan (MFPP)

30 What is a Member-funded pension plan? Union plans (where the employer is not responsible for any unfunded liability) are not allowed in Quebec under the SPP Act (1990), except for a few small plans in place before 1990 that were grandfathered. The FTQ lobbied since the early 2000s for a form of DB plan that would be better adapted to the environment of small and medium-size firms. A Member-funded pension plan is a new type of DB plan, set up by a union under the terms of a collective agreement, where the only obligation of the employer is a fixed contribution. Plan members, collectively, support the risk and, therefore, their contribution may be increased in case of a deficit The indexing reserve is a key feature to reduce contribution volatility while ensuring that pension benefits may be indexed when the plan is in surplus. Can be a single employer or multi-employer pension plan, but may not cover workers from other jurisdictions

31 How a MFPP regulates funding and benefit improvements in the event of a surplus Initial determination of member contribution Indexing Max 4% Cost of non-indexed current service At the next actuarial valuation Assets Surplus Indexing reserve Non-indexed liabilities No surplus may be used unless all plan members benefits are indexed for the period since the last valuation (max. 4% / year) Member contribution = Total contribution required (current service + indexing) MINUS Employer contribution No change to contribution

32 How a MFPP regulates funding in the event of a deficit Initial determination of member contribution At the next actuarial valuation Indexing Max 4% Cost of non-indexed current service Assets Deficit Non indexed liabilities No indexing or plan improvement allowed. Member contribution = Total contribution required (current service + indexing) MINUS Employer contribution Member contributions must be increased to amortize deficit (over 5 or 15 years) (alternative: reduce current service benefit)

33 Specific funding requirements No initial unfunded liability allowed No improvement unfunded liability allowed: benefit improvements only allowed if plan is in surplus (funding AND solvency) and if all benefits have already been indexed since the last valuation Final salary plans not allowed, only flat benefit and career average are permitted Actuary must estimate annually the solvency ratio in order to compute the lump sum payments to be transferred out of the plan Transfers out = Present value of benefits X Solvency ratio

34 Transfers and additional voluntary contributions: tools to improve the benefit level Existing plans may not be converted into MMFP but, if terminated, each worker may choose to transfer funds into the MMFP MFPP may accept transfers from any plan (DB, DC, RRSP) but must convert it immediately into accrued benefit (including the indexing reserve) Additional voluntary contributions accumulate with interest until retirement and may then be converted into a pension (including the indexing reserve)

35 MFPP, an opportunity for workers without a pension plan, but also for the labour movement A new type of pension plan attractive for workers who had access only to a capital accumulation plan or no pension plan at all Because of its limitations, does not constitute a substitute for existing DB plans, and therefore need to defend existing DB plans An opportunity for the labour movement to increase the attractiveness of joining a union

36 4 The push towards phased-in retirement

37 The context: an unfavourable demography When compared to the rest of Canada and the US: Lower birth rate, lower immigration, lower labour force participation rate In 2000, men in Quebec retired 1,5 years before Canadian men and 3,5 years before American men On a 30-year horizon, the labour force will increase in Canada and the US, but decrease by 5% in Quebec Present regulatory framework does not encourage phased-in retirement (both QPP and private pension plans) Present QPP rules not conducive to phased-in retirement Income Tax Act prevents people from contributing to a pension plan while drawing a pension benefit, or allows only very limited withdrawals that are at the expense of the benefits payable later

38 How the current system works if someone retires at age 60 QPP/CPP pension benefit is equal to 25 percent of the average indexed insurable earnings included in the contributory period (age 18 to retirement date), after excluding the 15 percent of years in which the earnings were the lowest (the drop-out provision); at age 60 the benefit is reduced by 30% (6% per year remaining to age 65). Typically, one may not ask for the benefit while still working, unless pay is low (< $ in 2007) or in the context of phased retirement. A beneficiary who returns to work later must contribute but will get little or no benefit improvement.

39 The Government s proposal: reduce early retirement benefits and increase incentives to work later Eliminate drop-out provision (15% of years with low earnings excluded) The pension is equal to 25 percent of total indexed earnings divided by 40, up to the maximum pension. Any earnings, high or low, increases the pension. These 2 changes together can reduce the QPP benefit at age 60 by as much as 11%: workers are therefore encouraged to work longer, in order to compensate the cut or to increase benefits beyond present level. Individuals may ask for QPP benefit even if they continue to work. Contributions made while drawing benefits raise future pension benefits by the same rule (25% of earnings divided by 40).. Formula for benefit reduction would stay at 6% per year remaining until age 65, but would increase to 8,4% for each year of work after 65

40 An alternative: yes to benefit flexibility and phasedin retirement, no to benefit cuts Strong opposition to the benefit cut envirsioned from labour and women s groups Both the Quebec Federation of Labour (FTQ) and a coalition of women s groups, came up with the same alternative OK to change the formula to provide more flexibility for phased-in retirement or beneficiaries who come back to work; The new formula should be at least equal to the present formula: the 15% drop-out provision would be replaced by calculating the lowest 15% of years at the level of average earnings for the rest of the period; Pensions would be equal to 25 percent of total indexed earnings divided by 42, up to the maximum pension. At age 60, pensions would be the same as in the current regime but would increase if people work after age 60. The reduction rule of 6% per year before age 65 would remain.

41 Ensuring su Impact of Q Contribution rate Rese 10% 8% 6% 4% 2% Contribution rate Reserve % Source: Régie des rentes du Québec (2001)

42 But there is also an underlying agenda: cut QPP benefits to compensate for the unfavourable demographic and labour market conditions The Quebec Government wants benefit cuts to the QPP in order to be able to maintain the same level of contributions as the CPP even though we have less favourable labour markets and demographic conditions than the rest of Canada QPP reform was put on hold in 2005, the Charest government wanting to rebuild its popular support by avoiding unpopular reforms until after elections. New elections in 2007 brought a minority Liberal government, so the reform is still on hold for now.

43 Phased-in retirement and Supplementary Pension Plans Consensus in Quebec that changes to the QPP to encourage phased-in retirement would not be effective if the current restrictions in the Income Tax Act on phased-in retirement for registered pension plans were not substantially modified Quebec government, backed by several groups, lobbyed the Federal Government March 2007 Federal Budget was a response of the Federal Government to that lobby

44 Quebec February 2007 Budget Not adopted - Elections declared a few days later. New budget to be tabled on May 24th

45 2007 Federal Budget Introduces Phased-in Retirement «Phased Retirement - Pension Payments and Accruals for Older Workers As the Canadian workforce ages, it will become more important for older, more experienced workers to keep a foot in the labour market. The Income Tax Regulations currently prohibit phased retirement arrangements by preventing employees from accruing pension benefits under a defined benefit registered pension plan if they receive a pension from the plan of the same or a related employer. This reduces incentives for older workers to remain in the labour force. The Government of Quebec has proposed changes to accommodate phased retirement arrangements under its provincial pension rules. Canada s New Government wants to help employers to retain older workers. To do this, Budget 2007 proposes to permit an employer to simultaneously pay a partial pension to an employee and provide further pension benefit accruals to the employee. The measure will apply only to employees aged 55 years and over who are entitled to an unreduced pension. These changes will come into effect beginning in 2008.» Source: Flaherty, James M. (2007)

46 Conclusion Significant changes in the regulation of pensions in Quebec Through the exchanges within CAPSA, some of these may come up in other jurisdictions Changes to QPP, especially a change in the formula to compute benefit in order to encourage phased-in retirement, likely to be introduced within CPP The developments raise a challenge for the trustee labour education programme Improved governance of pension plans Funding rules and sustainability of DB pension plans Setting up of member-funded pension plans Member education to defend the QPP and our DB pension plans, both of which are under attack