Enhancing Retirement Security for Canadians: Consultation Document
The Government believes that all Canadians deserve a safe, secure and dignified retirement, however in recent years company insolvencies have raised concerns about the security of pension, wage and benefit entitlements for workers and retirees. In keeping with its Budget 2018 commitment, the Government is seeking feedback from pensioners, workers, companies, experts and other stakeholders in order to take a whole-of-government, evidence-based approach towards addressing retirement security for all Canadians.
Canada's retirement income system (RIS) is based on three pillars:
- The Old Age Security program (OAS) and the Guaranteed Income Supplement (GIS) provide a basic level of retirement income.
- The Canada Pension Plan (CPP) provides basic earnings replacement for workers, financed by contributions from workers, employers and self-employed individuals.
- Employment-based pension plans (Defined Benefit (DB) and Defined Contribution (DC)), as well as voluntary tax-assisted private saving opportunities, such as Registered Retirement Savings Plans and Tax-Free Savings Accounts, provide additional saving opportunities.
Canada's RIS compares well to those of other countries, with a poverty rate among seniors that is significantly lower than the OECD average. The diversity of supports in the system is one of its greatest strengths, balancing fairness, affordability, and sustainability of retirement savings.
While the Canadian RIS has clear strengths, all three pillars require continual monitoring to ensure their long-term sustainability and effectiveness in the face of current and future developments. The third pillar in particular has been impacted by changing demographic trends, the global economic downturn in 2008, and low long-term interest rates. Funding pressures as a result of these trends have been particularly acute for DB pension plans in which the promised benefit level is backed by the employer. In general, DB plans contribute to the retirement security of many Canadians by providing a secure and stable lifetime retirement income. Traditionally, DB plans have been the predominant type of pension arrangement among employers offering employee pension plans. However, some employers have responded to DB plan funding pressures by closing their DB plans to new hires. Concurrent with this trend, private sector DB plan membership in Canada has fallen from 2 million workers in 2007 to 1.2 million workers in 2017.
In addition to long-term funding challenges for employment-based DB pension plans, significant concerns have been raised about retirement income security where the employer is at risk of insolvency and also has unfunded DB pension liabilities. While such insolvencies are relatively uncommon, some cases have resulted in significant pension reductions for retirees and workers. The risk of retirement income loss can be greater for employees in certain economic sectors that are vulnerable to market shocks, and which may also have large legacy pension and benefit obligations relative to their current workforce and earning potential. Further, the negative impact of pension reductions in employer insolvency can be exacerbated by the termination of employee benefit plans, which provide health, insurance, and long-term disability (LTD) coverage.
The current legislative framework contains strong preventative measures and legal remedies to reduce unfunded pension liabilities and employee exposure to employer insolvency. Federal and provincial pension regulation safeguards pension assets for the sole benefit of pensioners, and provides for the funding of pension plans over time. Insolvency laws include wage and pension protections, and can facilitate restructurings that enable a financially-distressed employer to stay in business and continue to sponsor a pension plan. Corporate law can also protect the interests of pensioners, through restrictions on payments to shareholders to maintain a corporation's financial integrity, and through liability for unfair or oppressive conduct by corporations or directors in appropriate cases.
The regulation of private pension plans and corporate governance in Canada is shared between the federal government and the provinces. Each jurisdiction adopts pension and corporate governance initiatives in accordance with its own policy objectives. Approximately seven per cent of private pension plans in Canada are federally regulated, with the remainder being provincially regulated. Around 10 per cent of corporations in Canada are incorporated under federal legislation, with the remainder incorporated under provincial or territorial laws. As such, enhancing the federal pension and corporate governance frameworks to further protect pension benefits against the risk of employer insolvency would not yield results for all Canadians. Further, with respect to pension regulation, the need for such enhancements may not be as high compared to other jurisdictions, as there have been extremely few incidents of corporate insolvencies affecting federally regulated plans. Nevertheless, the Government is open to hearing views on potential enhancements to the federal pension and corporate governance frameworks.
A Balanced, Principled and Evidence-Based Approach to RIS Policy
While Canada's current RIS legislative framework protects retirement security, the Government must ensure that the RIS continues to keep pace with developments in the marketplace and takes into account the perspectives of all Canadians. Recent insolvency cases have raised significant stakeholder concerns about potential gaps in the pension, insolvency, corporate and employee benefit regulatory environment. The Government welcomes views on whether additional measures are necessary to better protect employee pension and benefit claims against the risk of employer insolvency.
In its consideration of stakeholder proposals to strengthen the RIS legislative framework, the Government will follow a balanced, principled, evidence-based approach. The RIS regime includes both pension-specific legislation and broad marketplace framework laws designed to promote economic stability, growth and international competiveness for Canada, such as insolvency and corporate governance statutes. Given the broad reach of the RIS legislative framework, even targeted measures to improve the security of retirement benefits may have significant and unforeseen consequences for other sectors of the economy. In order to reach a balanced outcome, the Government will assess potential reform proposals with regard to their effectiveness in protecting pensioner and employee interests, whether the proposed action supports sustainable pension plan options, and their compatibility with the core principles and objectives of Canada's current RIS and marketplace framework laws.
- With respect to measures intended to reduce pensioner losses due to employer insolvency, for example, it is important to take other insolvency policy objectives into account, such as the need to balance the interests of other creditors, the potential impact on credit cost and availability, and whether the proposals would reduce the likelihood of a successful restructuring that could save jobs and preserve business value.
- With respect to corporate governance reforms, measures to better align corporate decision-making with pensioner interests must be weighed carefully against their potential impact on investment decisions, capital markets, and innovation by Canadian firms.
- Finally, changes to pension legislation intended to improve benefit security must consider the impact of any resulting increased costs to employers on the affordability and sustainability of DB pension plans, in particular that additional requirements do not result in employers closing their DB plans and offering no lifetime pension option for their employees. Increased pension costs may also have implications for economic growth and job creation.
The Current RIS Environment and Responses to Challenges
Since 2015, the Government has taken action to enhance Canada's RIS by restoring the age of eligibility for OAS to 65 in Budget 2016, and enhancing the CPP to increase the maximum benefit by about 50 per cent over time. Moreover, since the global economic downturn, it has also taken some specific steps to enhance retirement security and better protect employees from the consequences of employer insolvency (as well as consulted on a wide range of potential policy options), including in the following areas.
Pension Funding Rules
Federal pension law reforms since 2009 have enhanced protections for plan members and reduced funding volatility for employers. Federally regulated pension plans are required to be 100 per cent funded on a solvency basis, with any shortfall paid by the employer within five years in order to help ensure that plans have sufficient assets to provide for all benefits, both while the plan is ongoing and in the event of plan termination. This serves to protect the rights and interests of plan beneficiaries. At the same time, employers are permitted to amortize deficits over a prescribed period in recognition that pension plans may have, at times, a deficit too large to address all at once without harming the financial integrity of the employer. In this way, federal pension plan funding standards strike a balance between benefit security for plan beneficiaries and flexibility for the employer.
Recently, certain provinces have reformed their pension funding rules to ease employer solvency funding requirements for pension plans under their respective jurisdictions.
In 2008-2009, the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) were amended to require that outstanding pension contributions and unpaid wages and benefits (up to $2000 per employee) be paid ahead of secured creditors. The CCAA was also amended to codify judicial practices on interim financing and asset sales, and prevent the termination of collective agreements while under CCAA protection. In a statutory review of the BIA and CCAA in 2014-15, pensioner and employee groups advocated for priority status for unfunded pension liabilities and benefits, such as LTD programs. However, there was no consensus on this issue, as other stakeholders were concerned about the potential negative economic consequences of using insolvency law to address pension deficits (for example, credit market impacts, and effects of shifting pension losses to other creditors).
The Canada Business Corporations Act (CBCA) provides the basic corporate governance framework for approximately 310,000 Canadian corporations. In 2013-2014, the Government conducted public consultations with respect to the CBCA, based on a wide-ranging discussion paper. The consultations sought views from Canadians on a number of corporate governance issues that could impact retirement security, including executive compensation, greater accountability of corporate boards to shareholder and stakeholder interests, greater corporate transparency, the use of the oppression remedy, and corporate social responsibility. Recently passed legislative reforms provide for greater transparency and shareholder democracy, however, there was no consensus on more contentious issues, such as executive compensation.
While these changes will enhance retirement security for Canadians, a number of stakeholders have continued to press for further action in the areas of pension, corporate, insolvency and labour law in order to better protect employee and retiree pension claims.
Options for Stakeholder Comment
In light of the foregoing, the Government wishes to hear the views of stakeholders on further measures that could be adopted to enhance retirement security for employees and retirees affected by employer insolvency. As a starting point, stakeholders are invited to provide their further comments and views on previously-provided proposals, including enhanced protections for employee and pension claims in insolvency, such as:
- amending insolvency legislation to ensure that:
- unfunded pension liabilities are paid ahead of the claims of secured creditors; and
- employee claims for the termination of employee benefits in insolvency proceedings are paid before secured creditor claims (sometimes referred to as a "super priority").
In addition, stakeholders are invited to provide their considered comments and views on the following particular options.
- Solvency reserve accounts (SRAs): A SRA is an account of the pension plan into which companies could remit solvency special payments to eliminate pension deficits. Once the deficit is eliminated and the plan is in surplus, employers would be permitted to recover portions of their special payments from the SRA, in the form of plan surplus, that are no longer required to secure pension benefits. Allowing for SRAs would provide greater flexibility for employers when meeting their pension funding obligations and could provide greater incentive for companies to keep their pension plans well-funded by allowing employers to access certain surplus. To protect benefit security, employer withdrawals from the SRA would not be permitted to create a funding deficit.
- Pension funding relief criteria: The Minister of Finance has the authority to provide employers with special pension funding relief to improve the long-term sustainability of their pension plans. This can help avoid the scenario of employer insolvency and the termination of an underfunded plan. To enhance the Minister's authority in this regard and improve corporate responsibility, employers seeking funding relief could be required to agree to certain specified criteria or conditions, such as a prohibition of dividend payments while pension funding relief measures remain in place. However, in complex cases, employer insolvency and benefit reductions may be unavoidable.
- Transfers to self-managed accounts: When a federally regulated DB plan is terminated, it must purchase annuities for retirees that replicate plan benefits. Where plans are underfunded due to employer bankruptcy, purchasing annuities leads to permanently reduced benefits. Retirees could be provided with an additional option to transfer their reduced pension amount, as a lump sum, to a personally managed locked-in savings plan in order to allow for recoupment of losses through future investment returns. However, this would expose retirees to further risks, such as investment losses and the possibility of outliving their retirement savings.
- Clarify benefit entitlement: Federal pension legislation provides that members are entitled to their accrued pension benefits, with the intent that the full pension benefits are to be provided regardless of whether the plan remains ongoing or is terminated. Nevertheless, it has been suggested that the legislation may be unclear in this respect, leading some plan sponsors to propose amendments that would provide for different benefits on plan termination compared to while it remains ongoing (e.g., indexation only payable on plan termination if sufficient assets remain in the plan). This could result in members experiencing reductions for those benefits if a plan is terminated underfunded, particularly in an insolvency situation. In order to ensure that all pension benefits are afforded equal protection regardless of whether the plan is ongoing or terminated, the legislation could be clarified to provide explicitly that entitlement to pension benefits cannot be made conditional on the continued operation of the plan. Alternatively, amendments would be required to provide flexibility for DB pension plans to offer different benefits in different circumstances in pursuit of plan-specific objectives, such as addressing affordability and sustainability issues that may be critical to the employer.
Corporate Governance Options
- Restrictions on corporate behavior: Dividend payments, share redemptions and executive compensation packages could be restricted under the CBCA in cases where a company has a large pension deficit. However, these proposals would apply only to CBCA corporations.
- Increased corporate reporting and disclosure requirements: Currently, the CBCA requires corporations to make annual reports and disclosures to shareholders regarding corporate financial information. Recent CBCA amendments, while not yet in effect, will also require publicly-traded corporations to disclose to shareholders prescribed information pertaining to diversity among the board and senior management, and on diversity policies.In order to strengthen corporate social responsibility towards employees and pensioners, the CBCA could be amended to require corporations to report on policies that pertain to the interests of workers and pensioners, and require directors to promote the company's success for the benefit of all its stakeholders, including pensioners and employees. As with other potential federal corporate governance changes, only CBCA corporations would be affected.
- Enhanced "look-back" period: The BIA allows a court to set aside dividend payments or share redemptions made by an insolvent corporation within one year of the bankruptcy. The BIA and CCAA also allow a court to set aside reviewable transactions (transfers at undervalue) by the debtor company up to five years before insolvency. In order to enhance corporate accountability and better align corporate decision making with pensioner interests, the "look-back" period in the BIA and the CCAA could be enhanced to include the power for a court to set aside executive bonuses and compensation increases where a company with unfunded pension liabilities enters insolvency within a fixed period. The proceeds recovered could be earmarked for funding pension obligations. However, the proposal could create marketplace uncertainty as executives and shareholders would face greater risks of retroactive claw backs.
- Enhanced transparency in the CCAA process: In CCAA proceedings, the debtor company can negotiate with its creditors under court supervision on an agreement to restructure its debts. Pensioner interests in restructuring proceedings may be affected by limitations in the current court-supervised process. To better ensure fairness and equity for pensioners and employees, as well as to enhance transparency, the following amendments to the CCAA could be considered:
- increasing participation for pensioners and employee groups at the outset of proceedings by limiting the scope of initial orders;
- enhanced transparency for all creditors by requiring creditors to disclose their real economic interests; and
- creating a more equitable process by imposing an express duty of good faith on all parties to the restructuring.
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