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Enhancing Retirement Security for Canadians: Consultation Document

From: Innovation, Science and Economic Development Canada

Issue

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.

Background

Canada's retirement income system (RIS) is based on three pillars:

  1. The Old Age Security program (OAS) and the Guaranteed Income Supplement (GIS) provide a basic level of retirement income.
  2. The Canada Pension Plan (CPP) provides basic earnings replacement for workers, financed by contributions from workers, employers and self-employed individuals.
  3. 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.

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.

Insolvency Law

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).

Corporate Governance

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:

In addition, stakeholders are invited to provide their considered comments and views on the following particular options.

Pension Options

Corporate Governance Options

Insolvency Options

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