Improving Alberta’s Private-Sector Pension Legislation
The Alberta government is updating its private-sector pension legislation and policy. As part of that process, it prepared a Private Sector Pensions Review Consultation Paper and sought feedback from stakeholders. This submission from the National Institute on Ageing points Alberta policymakers toward recommendations included in the National Seniors Strategy, as well as recent research on dynamic pension pools and risk-sharing in pension plans. It was prepared by NIA Associate Fellow Doug Chandler and Director of Financial Security Research Bonnie-Jeanne MacDonald, with contributions from Laura Strachan and Barbara Sanders.
Recommendations from the National Seniors Strategy
In 2020, the National Institute on Ageing published the third edition of the National Seniors Strategy. This broad and thoroughly researched resource includes recommendations on employment-based pensions and other issues affecting ageing Canadians, and discusses policy options related to three aspects of income security:
1. Pensions can still be reduced as a result of company insolvency
For the dwindling segment of private-sector workers who still have pensions that are guaranteed by their employer, a rigorous regulatory regime is required to ensure that promises made are promises kept.
2. Lower-income Canadians need better ways to save for retirement
One idea to support innovation and modernization in retirement income would be the introduction of tax-free pension plans (TFPPs), built on the TFSA model rather than the tax-deferred Registered Pension Plan and RRSP model. Similar to TFSA contributions, TFPP contributions would use after-tax dollars and would not receive a tax deduction. They would grow free of tax, and withdrawals would not be taxed or added to taxable income. This means pension income from TFPPs would not be considered when determining eligibility for federal or provincial income-tested benefits, credits and subsidies. By doing so, “TFPPs would encourage and enable many Canadians to benefit from the substantial advantages of workplace pension plans without the sub-par (or even punitive) financial aspects of the existing registered system, while also supporting employers in their desire to offer valuable and attractive pension plans that meet their business objectives.” This idea is explored in detail in a 2019 NIA report, Filling the Cracks in Pension Coverage: Introducing Workplace Tax-Free Pension Plans.
3. Canadians are at risk of outliving their retirement savings
Variable payment life annuities (VPLAs) were added to the Canadian income tax regulations in response to industry concerns over the lack of good opportunities to turn retirement savings into lifetime income. The immediate challenge is to ensure VPLAs are made more widely available than is contemplated in the new income tax regulations. In a 2021 research paper titled Affordable Lifetime Pension Income for a Better Tomorrow, we explore the challenge of bringing this new opportunity to those who need it. Ensuring all types of Alberta pension plans can incorporate VPLA provisions and/or permit transfers directly to external VPLA providers is key. Maintaining consistency with federal and other provincial regulations is also important to allow third-party providers and national employers to establish plans with sufficient scale.
Risk Sharing and Provisions for Adverse Deviations (PfADs)
We understand that the existing Alberta PfAD formula for collectively bargained multi-employer pension plans is based in part on a 2013 Canadian Institute of Actuaries research paper. That research stemmed from a 2009 request from Alberta Finance and was intended to support a public policy perspective on multi-employer plans that were not subject to solvency funding requirements. Subsequent research on this topic includes:
a 2017 report that discusses the effect of going concern PfADs on solvency funding levels and plan designs other than the flat benefit formula typically found in a multi-employer plan; and
a 2018 report on Quebec’s Stabilization Provision Scale.
Most Albertans who work in the private sector do not participate in a pension plan that incorporates an employer guarantee of their level of retirement income. Instead, the employers promise to make defined contributions, and the obligation of the pension plan administrator is to use those contributions equitably to provide retirement income. The role of the regulator is to ensure these commitments are upheld.
The unspoken premise behind the imposition of PfADs on multi-employer and target benefit plans is that they are defined-benefit pension plans rather than defined-contribution pension plans. But as a recent article published by the Canadian Institute of Actuaries notes, when a minimum PfAD is imposed on pension plans with fixed contributions and variable benefits, “the effect is to create inequities between generations of plan participants.” In other words, rather than ensuring the promise that was made to employees is the promise that will be kept, a PfAD presupposes a different promise and makes it harder to keep the promise that was intended.
Alberta has proposed a clarification to prevent the use of an actuarial excess arising from a multi-employer or target benefit plan to reduce contributions. The concepts of going concern funding status, PfADs and actuarial excess or surplus developed on a benefit-accrual actuarial cost method, as contemplated in Alberta legislation, are appropriate for traditional defined-benefit provisions and are not as relevant to risk-shared plan designs (including jointly sponsored plans and VPLAs, as well as target benefit and multi-employer plans). If plans were regulated in a way that distinguishes between benefits guaranteed by an employer and variable benefits with fixed or shared contributions, regulation of actuarial excess on a benefit-accrual cost method would be replaced by concepts of equity among groups of contributors and beneficiaries.
This is not to say there is no place for provincial regulation of the actuarial aspects of these risk-shared plan designs. These kinds of pension plans require a clear statement on the trade-off between high initial benefits and manageable risk of benefit reductions, and ongoing monitoring to ensure the trade-off that was communicated to plan members is being respected. They require up-to-date expectations for mortality and future rates of investment returns from the plan’s evolving investment strategy. And they require an exit strategy, because nothing is forever.
Dynamic Pension Pools
We refer to pension plans that provide lifetime income through redistribution of longevity gains and losses as “dynamic pension pools,” although they are also known as “retirement tontines” or VPLAs. Although dynamic pension pools provide pensions that will last a lifetime, they have as much in common with Life Income Funds (LIFs) as with target benefit plans. Imposing maximum rates of withdrawal lower than the rates applicable to a LIF would place dynamic pension pools at a competitive disadvantage relative to LIFs.
Of course, it is possible to design a dynamic pension pool with a PfAD to make pension increases more likely than pension decreases (subject to the limit on expected indexation in the income tax regulations) but this is not typical of the way individuals manage their LIFs. The relationship among investment policy, benefit risk and initial benefit rate is a key design decision best left to plan sponsors. Research on this relationship is currently under way.
Dynamic pension pools, akin to other risk-shared plan designs, involve discrimination among retired plan members based on variations in the expected duration of payments, so there is a need for actuarial review of the basis for such discrimination. This could be:
the chronological age of the plan member and spouse,
optional guarantee periods and contribution refund benefits, or
health, income, disability status and other indicators of physiological age (especially if dynamic pension pools are to be fair to individuals with below-average income and health).
One possible approach would be to require a “fairness opinion,” along the lines of those required from actuaries of life insurance companies that provide adjustable policies. These opinions are described in OSFI guidance and an Educational Note for Canadian actuaries.