Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 3 - Evidence - October 30 Sitting
OTTAWA, Thursday, October 30, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-3, to amend the Pension Benefits Standards Act, 1985 and the Office of the Superintendent of Financial Institutions Act, met this day at 11:00 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, we have two groups of witnesses today; the first from the Multi-Employer Benefit Plan Council of Canada and the second from the International Association of Machinists and Aerospace Workers.
From the Multi-Employer Benefit Plan Council of Canada we have Mr. Bill Anderson, their president, and Ms Joan Tanaka, their vice-president.
Thank you both very much for coming.
In addition to telling us your views on Bill S-3, after which we will ask you some questions, it would be appreciated if you could take a couple of minutes at the beginning to tell us about your organization, since you have not appeared before us previously.
Please proceed.
Mr. Bill Anderson, President, Multi-Employer Benefit Plan Council of Canada: Honourable senators, I did intend to explain MEBCO's role as well as define multi-employer pension plans. MEBCO exists because many people in government today do not understand multi-employer benefit plans.
Multi-employer benefit plans exist because of an agreement between management and labour to recognize and fulfill the needs of individual workers in the pension and life and health area. Multi-employer benefit plans are operated through pension trusts on which, in almost 100 per cent of the cases, management and labour both sit and manage the pension trust. These trusts are involved in industries such as construction, entertainment, hotel/restaurant, transportation and retail food. Approximately 1 million individuals in Canada and their families are represented. It is a very large segment of the pension area in Canada as well as of Canadian society, one which we feel has not been properly represented in the past with the regulatory bodies.
Multi-employer benefit plans have separate needs from those of single employer pension plans and we will explain those as we go along.
The Chairman: On a point of clarification, we are familiar with the notion of a pension plan and a single employer. What is the business reason that led to several employers getting together to create a single pension plan?
Mr. Anderson: I will use the Ottawa plumbers as an example. They encompass 1,000 people and 400 contractors or employers. Through the union hall a person could work for four or five employers during one year. That employer does not have the incentive to create a pension plan for that individual. He may also have a limited number of individuals working at a time. Through the union, with trust funds and through collective agreements, money can be bargained on a cents-per-hour basis for each individual, regardless of where those individuals work.
The Chairman: That leads me to jump to the conclusion that it is a defined contribution plan, not a defined benefit plan. Is that right?
Mr. Anderson: No, they are classified as a defined benefit plan.
Ms Joan Tanaka, Vice-President, Multi-Employer Benefit Plan Council of Canada: They are what we in the pension industry would call a hybrid. The benefits are defined in that it will be a certain amount per month times years of credited service, which is your typical benefit program.
At the same time, the contributions are also defined in that they are stated in a collective agreement as being so many cents per hour, so many dollars per month or a percentage of earnings. In essence, we consider ourselves a hybrid, but for Revenue Canada purposes and for PA reporting we are considered to be a defined contribution plan because of the complexity and the numbers of people in the plan. These trust funds started with the Taft-Hartly legislation in the United States and spread into Canada.
Mr. Anderson mentioned the plumbers. In the retail industry, the lay of the land now is part-time work. In the past, in retail for example, before a plan that I work with was established in 1976, part time workers did not have a benefit program. The requirement was 700 hours or a percentage of the YMNPE, which stands for yearly maximum pension employable. Through the benefit trust fund, we do not care how much you make. We care about hours worked. The part time workers are then afforded a pension plan, as are full-time employees. These pension programs are getting bigger because of the flexibility offered within them.
The Chairman: That is a terrific explanation. Thank you very much.
Mr. Anderson: It is a hybrid. When you look at the pension adjustment aspect of it, it is handled like a defined contribution program. It is still classified as a defined benefit. We are unique. That is one of the points I want to get across today.
I should like to thank this committee for allowing us to speak and I should like to thank OSFI for allowing us to express our ideas and to communicate and consult with them on this process. It has been good from our point of view. I think we have both learned a lot. We have had good communication all the way along.
MEBCO involves not only management and unions but all the professionals who are involved with this structure -- the administrators, the consultants, the actuaries, the auditors and the legal people. We have a fairly large organization right across the country.
We believe that through the process we have had over the past year and a half many of our concerns with the initial draft have been met in this legislation. I will point out a little later things we think could be changed. However, we are 90 per cent satisfied with this legislation.
MEBCO believes there is still room for improvement with both OSFI and government in terms of them understanding that multi-employer benefit plans have needs separate from those of single-employer benefit plans. We will emphasize that over a period of time.
Some of our original concerns included the tone of the amendments and the tone of the bodies that were putting them forward. We were particularly concern that OSFI could take control of a multi-employer pension plan without due process. Due process still remains one of our major concerns.
I also think there was an exaggerated emphasis by OSFI on wanting to meet with the boards, on inviting intervention, on holding meetings with members who they think may be disgruntled, and on hiring outside professionals -- auditors, lawyers, actuaries -- at the expense of the plan.
We realize that regulation is appropriate but believe that over-regulation is non-productive. We still think that the legislation is not clear as to due process.
The Chairman: Can you give us specific suggestions as to what would improve the clarity, from your point of view?
Mr. Anderson: Rather than OSFI arbitrarily calling a meeting, we would like them to give exact reasons why they are calling the meeting and state what the purpose of the meeting is, rather than perhaps going on a chase.
The Chairman: I presume that can be handled in regulations.
Mr. Anderson: That is correct. One aspect of this whole process with which we are totally pleased is our ability to consult with OSFI on the regulations.
Ms Tanaka: Another example of due process is that the superintendent may require the administrator to invite members, former members, or any other persons entitled to pension benefits or refunds under the plan to attend meetings, or may call a meeting of the membership. That is not so difficult if you are a single employer and your employees are situated in close proximity. When you have members across the country, it is expensive to call members together to attend a meeting. That is true even for a provincial pension plan where the members are all in one province. They may be separated by hundreds of miles. To require that there be such a meeting without due process could be a very expensive endeavour, particularly if it is with regard to problems with the plan or perceived financing difficulties. That puts an extra burden on the finances of that plan.
The Chairman: I can understand the motivation for wanting people to be called together so they understand the problem. I also understand the practical logistics of your situation.
Ms Tanaka: We have no difficulty informing members and keeping the members involved as regards communication. Meetings may not be the answer.
The Chairman: In other words, you are not objecting whatsoever to the requirement for communication; you are objecting to the communication having to be face to face.
Ms Tanaka: That is correct.
The Chairman: Given modern technology, presumably one can find ways of getting around that.
Ms Tanaka: That is correct. Again, we can work this through in the regulations, but it is one example of due process that needs to be carried out. If there indeed is a requirement for a meeting, we have to be sure that it will be well attended, et cetera.
Senator Stewart: Presumably, the purpose of one of these meetings would not be simply to give out information. You say information could be transmitted without a meeting. Presumably, the meeting would have some other function than simply disseminating information.
Ms Tanaka: That is what is not clear.
Mr. Anderson: I do not quite understand.
Senator Stewart: I am relying on what has been said. It was said just now that you feel that bringing people from faraway places to a meeting is unnecessary because there are other techniques by which information can be transmitted to those people in their faraway places.
Ms Tanaka: Senator Stewart, I think the reference is with regard to proposed section 7.5 in the changes, which states:
An administrator shall hold a meeting, within the period specified by the Superintendent, to consider any matters set out in a written notice from the Superintendent requiring the administrator to hold a meeting.
Our interpretation of that is that a meeting may be required by a directive through the superintendent that would bring members together for the sole purpose of explaining something about the plan. It could be a solvency deficiency. It could be an adverse amendment. Our concern in that regard is that it would be difficult to hold these meetings in a multi-employer community. There may be other ways to communicate what is necessary and we feel that due process must be carried out before such a meeting is required.
Senator Stewart: You are saying that there may be circumstances in which meetings are required but that those circumstances should be more precisely designated.
Ms Tanaka: Absolutely.
Mr. Anderson: That cost is a large factor to union pensions.
Unions are usually labour-management and, in all cases that I know of, they are unionized labour. Unionized labour has a way of communicating within itself. That communication to the membership is ongoing through monthly meetings, hand-outs and so on. That information does flow down.
Another thing that is not understood is the politics of unions. For example, disgruntled employees may not be disgruntled particularly about a pension plan but just generally disgruntled and using that as a means to an end. We think it should be investigated.
Senator Stewart: How do you tie that in with the meeting? You do not want them brought together?
Mr. Anderson: If individuals within the union are complaining to OSFI so that OSFI will demand a meeting, often there may be politics involved rather than dissatisfaction with the pension plan per se.
Ms Tanaka: They may be disgruntled with their union, for reasons not related to the pension plan, but the superintendent is a forum for them to be heard. Experience tells us that that does happen.
Mr. Anderson: MEBCO must emphasize that pension plans are materially different from other financial services institutions. I cannot emphasize that enough. Pension plans are different from other financial services institutions. Regulators must fully recognize such differences. For example, it would be totally inappropriate for a bank to say, "We have insufficient assets to cover our liabilities. However, we will make that shortfall up from future profits." On the other hand, it is perfectly acceptable for a registered pension plan to say, "We do not have sufficient assets to fully fund all our payments which will liquidate the unfunded portion of our liabilities over a future period of not more than 15 years, but we have constructed a program of special payments which will liquidate this debt." That is different from the financial institution situation. We are taking a mortgage out on the future. To say that a pension plan has to be fully funded today will, in our opinion, dry up the defined benefit pension field.
In essence, the unfunded liability creates a mortgage and the special payments repay the mortgage loan over time. A pension plan is solvent as long as the present value of the special payments are treated as an asset. Our understanding of the original OSFI position was that a pension plan could not grant any benefit improvements until it had accumulated sufficient assets in advance to pay for the enhancements. I say again that such an approach would sound a death knell to private defined pension benefit plans.
It is impossible for an employer and/or multi-employer benefit trust to fund "prior to." It cannot happen. What will they do; borrow money from the bank to set up their pension plan? This process must be thought out and redefined. We have discussed this with OSFI repeatedly and I think we will have further discussions on this matter.
The Chairman: Are you saying that, in lieu of putting cash in, a legally binding commitment to put the cash in ought to be adequate?
Ms Tanaka: Yes. In the past that was sufficient. We were able to fund a benefit adjustment over 15 years and a solvency deficiency over five years. In other words, you took out a mortgage and you were committed by way of actuarial reports to make those payments into the future. With the solvency requirements and the way the legislation is written, not only federally but in some of the provinces, it is now a requirement that you be funded from a solvency point of view and perhaps even be overfunded from a solvency point of view before you do benefit adjustments. Those two kinds of requirements are very different.
In my mind, it is related to a mortgage. You buy a home, you pay the mortgage over an amortization period of 15 years and then you own the home. That is the way it used to be in a going concern valuation. With the advent of the solvency requirements -- and we understand they are there -- you can buy your home and amortize it over 15 years, but you must have money in the bank before you do that. That is tough, particularly with multi-employer plans where you have collective agreements causing contributions to come into the fund and you have no benefit improvement based on the solvency valuation. That is tough. It is tough to sell to the members, et cetera. However, if there is a commitment to pay off that liability, we see that as a more reasonable approach.
The Chairman: Is that a problem that can be resolved in regulation? I would think it could be because it is a definition of the regulations governing how the solvency requirement or an enhanced benefit are ultimately met.
Mr. Anderson: That is correct.
The Chairman: I do not see that as a problem with the bill but a problem with the regulations.
In your discussions with OSFI, have they indicated modest sympathy with your problem?
Mr. Anderson: Extremely modest.
Ms Tanaka: That is putting it mildly.
Senator Stewart: I am struggling to understand the situation. You talk about a mortgage. What collateral are you putting up? You are not putting up your houses. Are you putting up factories and so on?
Mr. Anderson: A collective agreement may be part of that. An example would be an increase in pension paid for over the long term in lieu of wage increases.
Senator Stewart: Let us take an example. I do not understand your business very well so my example may not be very apt, but let us try. This is a multi-employer benefit plan. Some employers are contributing regularly in a quite satisfactory way. Perhaps others are having trouble. How does this affect the ability of the council, or whoever makes the pension payments, to make those payments?
Mr. Anderson: First, the collective agreement binds the payment from the employers to the trust fund. As a third party administrator myself, one of our tasks is to ensure that delinquencies do not occur; that is, that there are no employers who are not contributing to the pension plan.
Senator Stewart: You are utterly successful in that?
Mr. Anderson: We are 99 per cent successful in that. There are companies that will go out of business that perhaps have not contributed over the last few months. There may be a loss of pension contributions at that time but, other than that, yes, we are successful.
There may be changes in demographics. There may be changes in economic situations that can affect the ongoing stability of a pension plan. That has happened. I think that is one of the reasons OSFI is working so hard doing what it is doing. However, it is unfair to penalize the many for a few.
Senator Stewart: Let us put that aside. Your complaint with the scheme as it is projected is, as I understand it -- and tell me where I am wrong -- that you object to the idea that at all times your plan must have adequate resources to perform the benefit schedule. Is that it? Why do you need the equivalent of a mortgage?
Ms Tanaka: We do not object. We are a little concerned with the solvency requirement to have the money available to improve a benefit if it is actuarially determined that the benefit improvement can be provided over a period of years based on a bunch of ongoing assumptions that there are sufficient contributions and that you can establish a reserve within the pension fund to protect against downturns in investment or loss of contributions due to an employer going bankrupt or the number of hours being reduced. In my personal opinion, our concern is that we must maintain momentum in these defined benefit programs in order to support the social system of providing pensions, because we see a backing off in that avenue. Therefore, we feel that we need to protect the private pension industry. Fifteen years may not be reasonable, but provide us with guidelines that allow the private pension plan industry, whether it be single employer or multi-employer, to enhance their programs based on sound financial principles that will supplement the social system. that is absolutely necessary.
In the single employer sector of the defined benefit field we are seeing that with the introduction of more and more legislation these defined benefit programs are being wound up and replaced with what we would call a money-purchase plan. They may or may not protect the same guarantee of retirement income that the defined benefit plan would.
We feel that in our industry, as advisors to pension programs, we must do what we can to protect the private sector. We are not objecting. We are saying that we need to take into account more reasonably, perhaps, the funding of future benefit enhancements and not make it so restrictive that there will never be an enhancement.
Members are members. People are people. If they do not see their benefit programs improving as the contributions are increasing, which is part of the wage packet, the member will say, "We do not need that program. I will look after myself." Human nature says that will probably not happen. That is our concern but it is not an objection.
Mr. Anderson: Our organization feels that OSFI should be doing more to promote pension plans. I know OSFI does not feel that is their jurisdiction or in any way their mandate, but it is certainly the mandate of other provincial jurisdictions. We believe that OSFI should be taking more of an aggressive approach to encouraging people to put money into private pension plans, particularly in light of what is happening in other social areas. Topics such as those we are talking about today will do just the opposite.
The Chairman: In the federal context, the Department of Human Resources Development might do that promotion. OSFI is a regulator and would be stepping well outside its mandate if it got into the promotion business.
I want to ensure that I understand the earlier point you were making. Is it correct that if you want to enhance the benefits of the plan to your plan members, at the present moment you can pay off the future benefit over a 15-year period?
Ms Tanaka: On a going concern basis, yes.
The Chairman: If you are in arrears, you have five years to pay those arrears?
Ms Tanaka: That is correct.
The Chairman: Neither of those by themselves seems to be a problem; is that correct?
Ms Tanaka: Correct.
The Chairman: You seem to say that it was the linking of the two that was causing you the problem; that is, if you are in arrears, you cannot enhance the plan simultaneously. Is that correct?
I understand that you are happy with the 15 years and the five years. I do not understand what the problem is.
Ms Tanaka: There is a suggestion, either in the regulations or in the legislation, restricting benefit improvements based solely on the solvency issue today, discounting the five years and discounting the 15 year-period.
Senator Tkachuk: It is a question of flexibility, it seems to me, Mr. Chairman.
Ms Tanaka: That is correct.
Senator Tkachuk: In other words, they want the right to manage the program and improve benefits without having the cash up front. Otherwise, why would they be doing that?
The Chairman: If you are not in arrears, it is not a problem, right?
Ms Tanaka: That is right, but there is a difference between a going-concern valuation and a solvency valuation. I am not an actuary so my explanation will be simplistic.
A going-concern valuation takes into account the funding of a pension plan into the future. A solvency valuation says that you must have all the money in your pocket in order to finance a wind-up of the plan today.
In a multi-employer plan environment, there is probably only a slim possibility that a pension plan could wind up "today."
The Chairman: It is a different proposition than with a single employer.
Ms Tanaka: It is absolutely different. We feel that looking at the solvency of the pension plan on a going-concern basis allows us to make benefit improvements over a period of time. The solvency valuation and the solvency approach to funding the pension plan is totally different because it is based on a wind-up.
We are saying that we need some flexibility in providing improvements to the benefit program.
The Chairman: Senator Tkachuk's point is dead on. You are looking for some increased flexibility. Is that a legislative change or a regulatory change?
Ms Tanaka: I believe it is regulatory.
Mr. Anderson:In the same vein as we spoke earlier, I would emphasize that different legislation and regulations across the country increase the cost to pension plans. OSFI is taking part in CAPSA and I think they are trying to standardize pension legislation in the country.
The Chairman: You are looking for a uniform system of regulation.
Mr. Anderson: Absolutely.
The Chairman: We are happy to say that is the right thing to do, but we obviously cannot do it by ourselves. Change is increasingly coming in this and other areas, but in the area of securities regulation change is not coming at all.
Mr. Anderson: Our concern is there for that.
The Chairman: We understand that.
Mr. Anderson: It seems to be the concern of others as well.
I would like to read from a memo which was sent to OSFI on October 28, 1996:
It is perhaps helpful to consider the original objective in enacting the Pension Benefits Standards Act in 1985 (Bill C-90.) Prior to the introduction of Bill C-90, the following statement was made:
This bill (C-90) achieves a fine balance, on the one hand, between the needs and aspirations of workers now and in retirement, and the objectives of pension plan sponsors on the other hand. This bill requires that minimum standards of fairness and adequacy are met, while ensuring a flexible system in which employers, employees and unions can work out tailor-made arrangements which best suit their own circumstances.
This government feels strongly that the voluntary nature of private pensions must be preserved. Therefore the basic standards contained in Bill C-90 must be accepted as reasonable by both employers and employees. We cannot impose unrealistic or overly burdensome standards on pensions. To do so would be to risk driving employers to toss in the towel and wind up their plans as they are free to do, or we may discourage them from establishing plans in the first place. Furthermore, the provisions in the bill must not be viewed by employees as too expensive lest they become discouraged and decide not to join pension plans.
I would like this committee to please take heed of that.
To summarize our members' concerns, first, we hope that we do not end up with over-regulation. We hope that due process is put into effect. We hope that OSFI will continue to recognize the difference between single-employer pension plans and multi-employer pension plans and that they will allow us to consult with them on that difference and other matters that come up in the future. Certainly we hope that OSFI will consult with us in formulating any regulations which are needed in the next few months.
Senator Callbeck: Under this legislation, the Minister of Finance will be able to enter into a multilateral supervisory agreement. Does that create any problems for you?
Mr. Anderson: I do not totally understand the question.
Ms Tanaka: I do not either.
Senator Callbeck: In the agreement, as I understand it, a lead regulator would be allowed to supervise a plan on behalf of other jurisdictions.
Mr. Anderson: Do you mean if there is a problem with the pension plan?
Senator Callbeck: No. In the province of Prince Edward Island, for example, there are people who belong to a federally regulated plan. As I understand that, they could be regulated by New Brunswick, for example.
The Chairman: In other words, the act gives provinces the right to delegate someone else to carry out the administration. Senator Callbeck used the example that P.E.I. could delegate to New Brunswick or to OSFI. Do you have any problem with that?
Mr. Anderson: No.
Ms Tanaka: From my reading I understand that the superintendent could be deemed to have power over the provinces. Is my understanding correct?
Senator Stewart: He may have the power to enter into an outside agreement.
Ms Tanaka: Yes. I am the administrator of a very large national pension plan. We have members in every province. The plan is registered in one province and we have to abide by the provincial regulations in all the other provinces. That is a very difficult thing to do. That is not necessarily fair because provisions may be more liberal in one province than in another.
I would like the province where the plan is registered to be the regulator, rather than having to abide by all existing provincial regulations. Therein lies the request for uniform pension legislation.
It is a big concern. It is expensive to pensions. It is not necessarily fair to members who are involved in one pension plan.
I am not sure whether that answered your question.
Senator Tkachuk: You are telling me that one of the plans you administer may have members living in British Columbia, Prince Edward Island and Saskatchewan, and you must conform to all paper work and regulations of all three provinces?
Ms Tanaka: In this case, we must conform to all of the provinces that have legislation because we have thousands of members in each province. Any sheet of paper that goes out to a member must comply with all regulators across the country because it may go to someone in Saskatchewan and someone in Prince Edward Island. It is a very difficult and expensive exercise. Quebec is involved as well. It is tough.
Senator Tkachuk: You are saying that if that plan is registered in Alberta, even though the members live all across the country, if you conform to the regulations in Alberta it would be sufficient. I am not sure about the regulators, but I think that is a good idea.
Ms Tanaka: That would be an easier plan to administer, correct. Retirement ages vary throughout the provinces. In Ontario it is 66. In other provinces it is 68, 70, 71 and so on. The members are not treated similarly. Whether they are treated fairly is a question for the regulators.
The Chairman: Thank you very much for appearing today.
Our next witness is Mr. Louis Erlichman, Research Director of the International Association of Machinists and Aerospace Workers.
Senator Stewart: Mr. Chairman, I think Mr. Erlichman heard the questions concerning jurisdiction that we asked of the previous witnesses. Would it be possible for him to begin by saying where the plan or plans with which he is interested is or are registered and whether this is a matter of provincial registration or whether there is a federal aspect to the registration so that we know roughly what parts of the ballpark we are in?
The Chairman: Of course.
Mr. Louis Erlichman, The International Association of Machinists and Aerospace Workers: I am the Canadian research department of The International Association of Machinists and Aerospace Workers. Our union is across the country in a whole number of different industries. Our biggest single group is in the airlines, which are federal jurisdiction. We have people at Air Canada and Canadian Airlines, for example, who are in single-employer plans, but are in every provincial jurisdiction except Saskatchewan, I believe.
The Chairman: How many members do you have, roughly?
Mr. Erlichman: About 50,000 in Canada. I personally deal with a variety of different plans in a variety of jurisdictions in terms of advising our members.
We also have a couple of multi-employer plans, one registered federally and one registered in Quebec, which are jointly trusteed plans run on the basis of contributions negotiated in collective agreements and then a defined benefit basis, and so on.
Therefore, I come at these things from a variety of angles. I do not claim to be an expert on everything. Let me preface my remarks as well by saying that I am not here representing our multi-employee plan trustees, who actually sent formal comments in on an earlier draft of these amendments. I saw this about a week ago. It has not been discussed with our multi-employer plan trustees and I suspect that some of them might disagree with me on some of the issues. That is a whole other point.
The Chairman: Does that respond to your jurisdictional question, senator?
Senator Stewart: Yes.
The Chairman: Please take us through your notes. We may interrupt you for clarification.
Mr. Erlichman: The clerk sent me the transcript of your meeting with the representative from OSFI on Tuesday. In reading that, a couple of other things arose that I wish to discuss as well.
The first point of our brief relates to proposed section 7.5 of the act, which gives the superintendent unlimited authority to require a meeting to be held with just about anyone without limits on notice and no requirements with respect to cost. This issue was raised by the prior speaker.
While I can imagine legitimate reasons why the superintendent might want to convene a meeting of particular groups -- for example, if he were unsure that their views had been fairly canvassed with respect to a surplus case -- I wonder whether such unlimited authority is necessary. Perhaps rules with respect to justification, notice and costs could at least be included in regulations under section 39 of the act.
Section 8(6) of the act concerning conflict of interest for plan trustees continues a problem which is already in the act. Section 8(6) requires that a person not accept appointment as the trustee of a pension plan if there would be a material conflict of interest between that member's role as a member of the board of trustees and that member's role in any other capacity. The key word here is "role".
The employee trustees of our multi-employer plan are union representatives. The employer trustees are management representatives from companies which participate in the pension plan. They have received legal advice that they could be contravening the act simply because they would appear in their roles as managers or union representatives to have the potential for conflicts of interest with their responsibilities as pension plan trustees.
I do not know if this was intended. It is apparently unique to the federal legislation. In other jurisdictions, conflicts of interest are considered on a transaction basis. That means that if a trustee is perceived to have a material conflict of interest with respect to a particular issue or transaction, he or she can withdraw from consideration of that issue.
The role-based definition of conflict of interest in the federal legislation seems to exclude anyone with a direct relationship to the parties to the plan from acting as trustees. There is considerable value to having trustees who are part of the sponsoring organizations and have both knowledge and interest in maintaining and strengthening the plan. It makes no sense to shut such people out and I hope the legislation can be amended to the remove this anomaly.
The Chairman: Have you discussed that with OSFI?
Mr. Erlichman: Apparently it has been discussed. I personally have not, but legal counsel for our multi-employer plan have discussed it.
The Chairman: I have not asked OSFI, but having had a lot to do over the years with conflict of interest rules, my guess is that the interpretation given to "role" was not what was intended. If that is your legal interpretation, perhaps you could fax -- I am trying to help OSFI here -- OSFI a copy of that legal interpretation so that if an amendment were required to avoid that problem, they could do so. I would be surprised if the legal interpretation is what was intended.
It is always easier to correct a problem that a lawyer has found if you see the legal opinion.
Mr. Erlichman: Certainly.
Section 9.1(1) requires the administrator of a pension plan to notify, in advance, pension fund custodians of the amounts that are to be remitted. For multi-employer plans such as ours, this is a practical impossibility. Contributions are based on hours worked and the administrator does not know until contributions are remitted what hours are worked and what contributions are required.
Apart from its impracticality for multi-employer plans, it would seem that this provision and 9.1(2)(b), which requires the custodian to notify the superintendent of delinquent contributions, are unnecessary since the administrator is already required by 9.2(1)(a) to notify the superintendent immediately of any delinquencies.
If there is a genuine concern about improving the security of plan members when employers are delinquent in making contributions, it might be better addressed, not in this legislation but in bankruptcy legislation, by giving higher priority in the event of the bankruptcy to pension contributions deducted and theoretically held in trust.
Section 9.2 is designed to put into the act a clear set of rules for the process of distributing pension surplus similar to rules in place in other jurisdictions. It seems to be an attempt to codify what is already happening as a result of various court rulings and ad hoc regulatory decisions.
It is my belief that removal of surplus from an ongoing plan should not be allowed, and surpluses on plan termination should be distributed only to plan members and beneficiaries.
That being said, I have a specific concern with the wording of 9.2(1)(a) which seems to suggest that the superintendent can decide that under the plan the employer is entitled to remove surplus and that the superintendent can approve a refund without going through the process outlined in 9.2(2) to 9.2(11).
There have been many cases in which the courts have ruled that the wording of a particular plan document which purports to give entitlement to surplus to an employer is by no means conclusive.
Evidence of the possibility of employer entitlement should only open the door to the process outlined in section 9.2 for general negotiation and approval for surplus distributions and the superintendent should not have the authority to short-circuit the process.
The Chairman: You are referring to the section of the act which says that if the plan entitles a surplus to the employer, then the superintendent may do certain things. Are you saying that the issue of whether or not the employer is entitled is an issue to be settled by the courts and not by the superintendent?
Mr. Erlichman: Essentially. Since the legislation in most jurisdictions now says that your plan has to say something about who gets the surplus, it becomes automatic. Every time a consultant does a revision of a plan, they stick in a clause saying the surplus all belongs to the employer and he can do whatever he wants with it.
My general advice to our groups when I see that is that they should send a letter to the employer, copied to whoever the regulatory authority is, saying, "We never agreed to this. The surplus belongs to plan members and beneficiaries." What they are doing by sticking their language in the plan and what we are doing by sending this letter is preparing ourselves for a potential legal battle down the road, which may never happen.
My concern is that the superintendent will see language like this in a plan which says the surplus belongs to the employer to do with what it will, and say, "Well, they have the rights. We do not have to go through any of the process or canvass anybody."
It has only been in the last 10 years, since the Dominion Stores case in 1986, that any of the regulatory authorities were telling people that employers were asking to take surplus out. Prior to that, when an employer asked to take surplus out the regulatory authority said, "Oh, there is surplus? Here it is." They did not even tell anyone about it before the fact to give people an opportunity to respond.
I am concerned that the wording creates a risk that we would return to that situation. A situation has developed under which people end up making deals on surplus. In the real world, that is not the worst thing that could happen.
The Chairman: If you get into what you call the process, it is designed precisely to encourage that kind of deal-making.
Mr. Erlichman: That is true.
The Chairman: Which is a negotiation. The word "deal" often sounds pejorative. The reality is that it is a negotiation between two parties, each of which has some leverage of power, and the answer is to see if they can reach a reasonable accommodation between them.
You are not objecting to that element of the process; you are objecting to the notion that if on the face of the plan document it looked as if the employer had the right to all the surplus, then that negotiation process or deal-making process might never occur.
Mr. Erlichman: That is right.
The Chairman: If it did not occur, you would then have the right to go to court to argue that the employer was not entitled to it. You would just like to find a way of avoiding that court challenge if you could?
Mr. Erlichman: That is right. Most of these cases end up not going to court. Obviously some of them have, and some have gone to the Supreme Court.
The Chairman: People settle.
Mr. Erlichman: In most cases our lawyer and the employers' lawyers look at the documents and all the paper dating back 60 years and odds are given on winning in front of a judge. Their lawyer will tell them something and on the basis of that and other factors you end up making a deal.
The Chairman: Do you object to that kind of process?
Mr. Erlichman: We live with it. My official position would be that there should be no surplus removal in an ongoing plan at all.
Senator Tkachuk: The surplus belongs to the benefactors; is that right?
Mr. Erlichman: To the members and beneficiaries, particularly in an ongoing plan. If the argument is that the actuaries are making a long-term valuation and the assumptions on which this long-term valuation is based are reasonable, then if there are seven good years -- getting biblical -- you should not be taking the money out. You would be presuming, if these actuarial assumptions are reasonable, that there will be seven bad years and you will need it.
One can even argue against contribution holidays on that basis, but certainly against taking funds out of ongoing plans. That is the position. If that does not happen to the legislation, then it is a useful thing to have a fairly clear set of rules about how you cut a deal.
Section 23(6) of the Act allows for the reduction of a survivor benefit by the amount of group life benefit. This provision has no place in pension legislation. Group life insurance is a separately negotiated taxable benefit and it is totally inconsistent and unfair to allow employers to save on pension payments because of it.
The Chairman: Is that a new provision?
Mr. Erlichman: No. It came in in the 1985 act.
The Chairman: It is sort of like the linkage of pension benefit to CPP; is it?
Mr. Erlichman: There used to be direct offset. I am not aware of any myself. There used to be plans in which you would reduce the amount of your benefit by the actual amount of the CPP. Currently, many benefit formulas take into account the CPP so it is 1.65 per cent times user surplus minus something else.
The Chairman: Is the net effect is the same?
Mr. Erlichman: This is different. This is to do with the survivor benefit. In the legislation there is a minimum survivor benefit which is the commuted value of the benefit this person has earned. If the person dies before retirement, there is a provision in the legislation which says that, to be fair, the surviving spouse, for example, has to receive the commuted value of the benefit this person has earned. If the person died at age 53 and would not have been eligible for a pension until age 55, it is only fair that the surviving spouse gets this. However, the legislation allows group life coverage, which is quite a different thing.
The Chairman: In other words, they in effect negate the value of the life insurance.
Mr. Erlichman: Or the pension; one or the other.
The Chairman: My description is more helpful to your case in the sense that if they did not have life insurance they would get a survivors benefit of X, and because they happen to be with someone who had a group life plan and that life insurance of $100,000 has a present value of whatever, they use that to reduce the value of the survivors benefit. The net effect is they negate the value of having the life insurance in the first place. Why would you have the life insurance if that was going to happen?
Mr. Erlichman: Yes, if it would be offset in the pension plan.
The Chairman: Exactly. This is not new?
Mr. Erlichman: No.
The Chairman: I have been on this committee for 10 years. I have never heard of that and I find it really strange.
Senator Tkachuk: Does this issue apply to senators?
The Chairman: You are now striking close to home. That is a very good question.
Senator Tkachuk: We have group life.
The Chairman: I do not know the answer to that question, Senator Tkachuk. The thought had crossed my mind.
Thank you for raising that with us. We did not know anything about it.
Mr. Erlichman: The next item was discussed as well by the earlier presenters. The proposed section 13 gives the superintendent the authority, without the necessity of regulations, to require the provision of pension plan information to members and other plan beneficiaries.
As someone who remembers the days when employers could refuse to provide basic plan information to members, I believe strongly in the importance of access to all plan information, a requirement in this legislation since the 1980s.
I do have some concerns, however, relating to multi-employer plans and the proposals in the discussion document circulated last year. It was suggested at that time that there might be a requirement to provide each plan member and beneficiary the details of every pension plan transaction, as well as a requirement for annual membership meetings to be attended by plan actuaries and legal counsel.
Our federally registered multi-employer plan has about 2,000 members spread out between St. John's and Thunder Bay. Its assets are invested in pooled funds by two major investment managers. Actuarial information and investment information are both available and widely distributed across the country.
I would ask only that, if the superintendent is to be given the authority of section 13, he recognize the cost impact on multi-employer plans such as ours of any requirements he imposes. It would be even clearer if the information requirements were outlined in regulations.
The Chairman: Your problem is not the legislative thing, it is that you need an element of cost effectiveness in considering how the regulations are ultimately interpreted.
Mr. Erlichman: It does not make a lot of sense to be sending a stack of documents about the sale of 500 shares of X, Y and Z to 2,000 members who will just throw them out. The information should be available, certainly; but to require it to be sent out imposes a great expense and does not make a lot of sense.
The Chairman: Given the advent of modern electronic communications technology, is there a way to do part of this through web sites or some other means that would be less expensive, or does confidentiality make that impossible?
Mr. Erlichman: A certain amount of this stuff could go on to web sites. However, only a minority of the population and a minority of the membership of pension plans have access to the Internet. The majority of people will not go down to the public library to access the Internet on computers there.
I have a question about section 7 of the act, and this is not a rhetorical question. What is the difference between a pension committee and a pension council? They are both named and partially described, but there are no definitions. As far as I can see, there are no evident differences between them.
The Chairman: I do not know the answer to that question. We will ask OSFI when we see them on Tuesday.
Mr. Erlichman: Finally, when the earlier version of this legislation was introduced in March 1997, there was a reference to best practices guidelines which were to be released with the legislation. What is the status of the guidelines?
The Chairman: With regard to the governance guidelines, we were told that they would be ready shortly and that they would in fact be presented and discussed with this committee. The best answer I can give you is "very shortly".
I am informed that we will see them before Christmas.
Mr. Erlichman: I have a couple of others points that I picked up from reading the transcript of the presentation on Tuesday. One of them was specifically discussed by the earlier group from MEBCO. It has to do with this notion that OSFI is switching away from approving plan amendments. In some ways you can say it is not that big of a switch. You can send in plan amendments to OSFI and wait a couple of years before you find out if they have approved them. I am not sure it is terribly clear.
I am in a situation where I will receive a copy of pension plan amendments from one of our groups. I would like a little assurance that if there are concerns they will be addressed. From the presentation on Tuesday it appeared that the plan sponsor, typically the employer, will certify to say that the amendments are in line with the legislation and OSFI will not check them, except in exceptional audit cases.
If plan members have specific problems with the regulations, I would like to be assured that OSFI will respond. I realize there are capacity problems in OSFI in that they have 21 people and 4,000 pension plans. As someone with 150 pension plans to deal with, I have sympathy for that.I hope that they will put some effort and capacity into responding to that element beyond simply narrowing their focus to a financial element.
The second issue which I would like to address was raised by the group from MEBCO. It has to do with putting into the legislation -- and I must admit that I was not clear on this until I read the notes from the Tuesday meeting -- disallowance for making improvements, negotiating amendments or making amendments to the pension plan if there is a solvency deficiency in the plan. I have negotiated, and hope to do so in the future, improvements to pension plans in which there were solvency deficiencies and therefore I am very much opposed to this. It is far too rigid and heavy-handed. There is no magic in the solvency ratio number.
To give an example, there can be a negotiation where, among other things, you are discussing pensions. You may be dealing with an actuarial valuation that is relatively up to date; for example, one from December 31, 1995. It is less than two years old. Let us assume that at that point there was a solvency ratio of .97, so there is a solvency deficiency in the plan. You may be at the bargaining table negotiating for the next three or four years. This is your opportunity to improve that pension plan in the next three or four years. However, the employer says that they cannot do it because, under the legislation, if there is a solvency deficiency as of the last valuation they cannot make any improvements, even though that valuation is two years old. I guess there is special dispensation allowed from OSFI, but that will not happen overnight in any case.
The solvency numbers, the solvency valuations and the solvency ratios are interesting. However, the fact of a solvency deficiency is not in itself a sign that it will be imprudent to make improvements. I have been involved in cases where, on the surface on the basis of the most recent valuation, a plan had a very strong ongoing surplus but it would have been extremely imprudent to make pension plan improvements because of what would be happening in the future.
This is more than simply a regulatory issue to allow OSFI to be more sensitive. Under the legislation it is illegal to make these improvements based on a specified solvency deficiency below a certain level.
The Chairman: One hundred and five is what they used.
Mr. Erlichman: Therefore a plan has to be more than solvent. That just does not make sense in the real world.
If in the last valuation there was a solvency deficiency in a plan, or if the solvency was below 1.5 or 1.05 or 1.1, a red flag could be raised for OSFI to take a look at the situation.
As was said earlier, if this kind of requirement had been in place for the last 30 years, there would not be any defined benefit pension plans in this country because almost every plan that starts up does so with unfunded liabilities. Any plan that improves develops unfunded liabilities.
Again, you are dealing with moving targets. Actuarial science is certainly not an exact science; they are guessing at things. With regard to what the solvency ratio happens to be at a certain time, the solvency ratio of a particular plan will have varied substantially between Monday of this week and today, depending on what the market is doing and so on.
I know of situations, although not in the federal jurisdiction, where after the 1987 crash companies imprudently took contribution holidays, knowing there would be a solvency deficiency situation the next time a valuation was done. However, because they could get away with it, they did not put any money in.
If the issue is prudence and trying to protect plan members, it requires more sensitivity than I believe is in the legislation.
The Chairman: It is a regulatory issue and not a legislative issue, which makes it easier to adjust, in the sense that it is one of the announced regulations but it is not in the legislation.
One can understand the philosophical or policy position which asks why you should be allowed to expand the benefit of your pension when, from an actuarial standpoint, there is not enough money to fund the benefits you are already promising. Intuitively and plausibly that is a reasonable policy position. I think what you are saying, though, is that in the practical world, where negotiations only take place every three or four years and where valuations are a little late and depend somewhat on assumptions, you need more flexibility. While one would want to respect the directional intent of the policy, which is that if you become dramatically in arrears you clearly cannot proceed to lay on lavish new benefits, one nevertheless needs some flexibility to recognize that, as you put it yourself, this is not an exact science and therefore some judgment, as opposed to black-and-white statements, are needed. Is that a fair assessment of your position?
Mr. Erlichman: It is. My concern is that you say it is a regulatory and not a legislative issue.
The Chairman: Procedurally that matters to us in the sense that it is not in the act but in the proposed regulations under the act and that it is the act that ultimately gets voted on by Parliament and the regulations come back through a different process. That is all I am saying.
Mr. Erlichman: If it is put into the legislation in the form that it is now, the regulation will stick a number there. Conceivably the regulation may never be enacted, but other than that there will be a number, and that will have legislative force. My preference would be that if they want to put something into law, it should say that in certain circumstances it will require notification of OSFI, and OSFI would be in a position, in certain cases, to deny the request if it were imprudent.
The Chairman: They could make a judgment call.
Mr. Erlichman: If it were written in that way, that would be fine.
The Chairman: In other words, OSFI should have some flexibility rather than be faced with a black-and-white, hard-and-fast rule. I understand that.
Senator Stewart: I am trying to understand what some of the goals of the proposed legislation are. I suspect that one of the goals is to prevent a situation where management, on the one hand, buys short-term peace and leaves the long-term future of its employees to an uncertain fate. I can see a bargaining situation where management and, indeed, the representatives might say, "That makes us all happy for now and we will let the plan, in 10 years when we are all gone, worry about itself."
Mr. Erlichman: Solvency deficiencies have to be made up within five years under the current legislation.
Senator Stewart: So my 10 years is not apt.
Mr. Erlichman: If you are in a situation where the plant is going to shut down next year, you may be deluding yourself to say, "We are going to pump up the pension benefits, they will not be funded and no one will ever pay them." In that circumstance, the union negotiators would not be doing their job if they told people they would be getting this benefit when they knew the plant would be shutting down in six months. We often do not know if the plant will be shutting down in six months and if the employer does this it is something you have to deal with.
If you have the improvement, the employer will have to put more money in than before because he will increase the solvency deficiency. In the next five years, he will have to put all that much extra money in. If the plant shuts down next year or in two years, you are better off than you were in any case because there will be more money in it. Whatever is in that fund will be divvied up, even if there is a solvency deficiency. It may only be 85 or 90 per cent, but it is divvied up. That is regulated. Retirees get first crack and then on down the line to the vested employees and so on.
I do not see how you are saving any one by not negotiating it. You may be being somewhat dishonest with your membership, which is something we should not do. I certainly would try not to do that, but I am not sure that OSFI is saving any one anything. It is not as if the money is going in and disappearing. If you negotiate an improvement, it will be a requirement for the employer to put more money in. Even if the plant shuts down and the plan is terminated, there will be more money in there at the end of the day than there would be if you did not have the improvement. Therefore, they are not worse off; they will just not get what they were promised.
Senator Stewart: You say put more money in, but let us say you have a plan that is running and its investments have done very well. Presumably, the union negotiator says, "We can afford to take a lot more money out of that fund."
Mr. Erlichman: That is right.
Senator Stewart: You talked earlier about the seven years. Perhaps that would be unwise because the seven bad years to which you made reference may be just around the corner.
Mr. Erlichman: That is something that we work out in negotiations. The problem I tend to run into is that we end up paying the same nickel over and over again in negotiations.
In a surplus situation, obviously OSFI does not care, and this legislation does not seem to worry about that. If you develop an unfunded liability, the question is how you pay them off, but this legislation does not directly affect that.
The Chairman: Thank you very much, Mr. Erlichman. Your comments were helpful.
The committee adjourned.