Major trends are reshaping Canada’s pension industry—from greater employer interest in sharing or off-loading pension risk to an increased focus on de-risking.

Bye-bye, DB

More and more Canadian employers are moving away from DB plans by eliminating the DB option for new hires or by introducing a soft or hard freeze, said James Fu, a lawyer at Borden Ladner Gervais (BLG), said at a BLG event in Toronto on Thursday. With a hard freeze, no further service or salary is recognized for the accrual of a DB pension. With a soft freeze, the employer freezes services but not earnings.

As the number of DB plans declines, Canada is seeing a growing trend towards capital accumulation plans, such as pooled registered pension plans (PRPPs) and voluntary retirement savings plans (VRSPs)—new arrangements designed primarily for the self-employed and for employees without workplace pension plans.

“[The PRPP] means much more limited risk for employers than a DC plan,” said Frederic Masse, partner at BLG, speaking at the same event.

Read: Federally registered PRPPs now available

More interest in shared-risk pensions
While many DB sponsors are moving towards DC plans, others are increasingly interested in target benefit plans (TBPs). A hybrid between a DB and a DC plan, a TBP collects defined contributions to secure a targeted benefit in retirement. Pension benefits and contributions adjust over time depending on the plan’s performance. If the returns are lower than expected, the plan increases contributions and/or reduces benefits. If the returns are higher than expected, benefits can increase or contributions can decrease.

“There’s one thing for sure: it never costs a dime more to the employer than it’s supposed to,” said Masse.

TBPs are already a reality in New Brunswick. In Quebec, the government has approved them for all union-managed pension plans, noted Masse.

In April, Ottawa proposed to make them available to the federally regulated private sector and Crown corporations. It will probably take a couple of years before the outcome of this proposal is known, said Fu. “We haven’t seen the legislation introduced in the House [of Commons],” he added.

One potential legal and ethical issue with TBPs has to do with taking members’ accrued defined benefits and turning them into target benefits without consent. There isn’t perfect clarity on that yet, said Masse. “It’s going to be a debate for the next 25 years,” he added, explaining that this is when the full impact of these conversions will be felt.

The competing trend to TBPs are contractual shared-risk pension agreements, said Masse. “When I’m at the bargaining table and I’m not able to sell either DC or a TBP, one of the things that can more easily be sold to a union is not the amendment of the plan, but the introduction into the collective [bargaining] agreement of a provision that says: if there is deficit in the future, you will assume through your members at least half the cost,” he explained.

Masse added that there has been an evolving trend over the last couple of years and precedents are out there.

Read: Ottawa calls for target benefit plans

CPP enhancement debate
Over the past year, many have expressed support for increasing Canada Pension Plan (CPP) benefits through higher contributions to address the issue of Canadians not saving enough for retirement through private pension plans.

But the idea of CPP expansion has its critics, too. They argue it would negatively impact businesses and limit people’s ability to invest in other important things, such as buying a house, making mortgage payments and contributing to an RRSP.

For now the Conservative federal government likely won’t take any steps towards CPP expansion, said Fu.

Read: CPP expansion debate heats up

ORPP developments
In May, Ontario’s Liberal government called for the creation of a mandatory provincial pension plan styled after the CPP, the Ontario Retirement Pension Plan (ORPP). The plan would offer Ontarians a benefit on top of the CPP.

“The ORPP would be the first of its kind in Canada and would expand pension coverage initially to more than three million working Ontarians who currently rely on the CPP, OAS and their own savings for retirement income,” says Ontario’s budget proposal. “It could later be integrated with the CPP should negotiations on an enhancement be successful in the future.”

“It is being developed at the moment, so it looks like the government will push through with this,” said Fu, adding that it will probably take effect about two years from now.

The ORPP would require equal contributions from employers and employees amounting to no more than 1.9% each on annual earnings of up to $90,00. The ORPP aims to provide a replacement rate of 15% on a person’s earnings, up to a maximum yearly threshold of $90,000.

Many employers in Ontario might wonder whether they will need to contribute to the ORPP if they already offer a pension plan, said Fu, adding that “the Ontario government hasn’t been very clear on that yet.”

Read: Ontario moves ahead with ORPP

More de-risking
Most Canadian DB pension plans have improved their funded position over the past couple of years thanks to market generosity. This has made it affordable for many of them to consider various de-risking strategies, such as liability-driven investing and greater allocations to alternative assets.

Another emerging de-risking trend is transferring the risk to insurance companies through the purchase of annuities, said Fu. Employers can choose an annuity buy-in, in which case they buy a group annuity contract and they—rather than the insurer—pay retirees. To fully transfer the risk to an insurance company, employers can opt for an annuity buyout, in which every pension plan member has an individual annuity arrangement with the insurer.

Read: Canadian Wheat Board off-loads pension risk to Sun Life

Copyright © 2021 Transcontinental Media G.P. Originally published on

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