“Everything to each other, and if we both go, to the kids”. Sound familiar? Estate planning is actually far more complicated than this. When preparing for your estate planning meeting with Cox & Palmer there are a number of things to consider. The checklist below will serve as a helpful tool. Estate Planning Preparation – […]read more
Pension Benefits Act – Shared Risk Pension Plans “The Dutch Model”
The New Brunswick Government is in the process of amending the Pension Benefits Act (“Act”) to legally permit a new pension model. That pension model is a hybrid between a defined benefit plan and a defined contribution plan. It is referred to as a “Shared Risk Pension Plan”. This new model is based upon a Dutch model which has remained unscathed during the “dot.com” crash and the current recession.
The amendments and accompanying regulations are set to come in to force on July 1, 2012. The regulations have not been disclosed publically and will contain much of the detail. As such, many of the details are unknown. What we do know is that the changes will be revolutionary.
New Brunswick will be the first jurisdiction in North America with such a plan.
SHARED RISK PENSION PLAN
The Shared Risk Model has characteristics of defined benefit plans and defined contribution plans. In a defined benefit plan, the employer promises a specified monthly benefit upon retirement. The benefit is calculated using a predetermined formula based on the employee’s earning history, tenure of service and age. In a defined contribution plan, the employer promises to contribute to the plan and future benefits depend on the contributions of individual plan members.
Under the Shared Risk Model, a basic benefit is paid out but it may be increased or reduced, depending on plan performance. Contributions also have the potential to increase, be reduced or suspended. Further, ancillary benefits are only paid out if there is sufficient funding. Both the employer and the plan member share the risk as ancillary benefits will depend on the plan’s ability to pay.
The “Risk” of the “Shared Risk Plan” is the possibility that if the Plan performs poorly, contribution levels could be increased and benefits could be reduced or suspended.
Studies show there is a minimum of a 97.5% probability that base pension benefits will never have to be reduced under the Shared Risk Model.
Ancillary benefits are those benefits offered by the plan over and above the base benefit. The draft legislation lists several possible ancillary benefits which Shared Risk Plans may include. Payment of these benefits is not guaranteed to plan members but will depend on the Plan’s ability to pay.
Pension Plans under the Shared Risk Model will implement changes on a go-forward basis. This means that all benefits accrued up to the conversion date will be protected and from that date forward, benefits will be determined according to the terms of the new plan. Those employees who have already retired will enjoy the same benefits they are currently enjoying but benefits such as indexing will be conditional on plan performance.
Everything employees have earned in pension benefits up until the plan is converted on July 1, 2012 will be protected at transition.
An increase in contributions is not an inherent part of the new model. Employers and/or Plan Administrators will determine the appropriate level of contribution for the Plan. As many pension plans are currently underfunded, it is likely that plans under the Shared Risk Model will require an increase in contributions. Further, contributions are subject to change depending on plan performance, although such changes must be in accordance with the funding policy for the plan.
If the Plan performs well, there may be a surplus of funds. Under the Shared Risk Model, surpluses are to be distributed to plan members in benefits. Surplus may also go toward benefits which were previously reduced or suspended. Regulations and Guidelines will set out how surpluses will be managed.
Ancillary Benefits (s. 100.51)
Shared Risk Plans may provide the following ancillary benefits only if the plan is able to pay:
(a) early retirement benefits in addition to the early retirement pension;
(b) postponed retirement benefits in addition to the pension;
(c) bridging benefits;
(d) pre-retirement death benefits in addition to the benefits;
(e) escalated adjustments;
(f) the benefits payable as a result of changes to the normal form of pension payable under the pension plan; and
(g) any other ancillary benefit prescribed by regulation.
Guaranteed Indexing can be eliminated (s. 100.52(3))
The regulations will enable the plan to put in place contingency indexing. The indexing will affect all plan members. If the funding levels are not present, then indexing will be reduced or eliminated retroactively.
Depending on the performance of the plan, the cost of living increase may or may not be included in a retiree’s benefits.
“Final Averaging” (s. 100.52(20))
An employer will be able to freeze final averaging at the date of conversion. Future base benefits can be based on career-average earnings rather than final salary and may be subject to increase, decrease or suspension.
“Funding Policy” (s. 100.52(2))
The plan will be subject to a conservative funding policy which requires surplus in order to increase benefits. Further, benefit premiums will be conditional on the performance of the plan. This policy must be approved by the Superintendent of Pensions.
Under the Shared Risk model there are strict guidelines for the management of surpluses and deficits. A fund performing well will begin by paying cost of living increases, including any delayed cost of living increases from previous years.
The outlook of the fund is always for long-term stability. Also, the fund’s investment structure reflects that goal, protecting the fund against huge downward swings. This same security-focused approach also makes huge upward swings in fund values less likely.
“Investment Policy” (s. 100.4(1)(c))
The plan will be subject to a conservative investment policy vehicle. This policy must be approved by the Superintendent of Pensions.
Valuation of Plans (s. 100.64)
The valuation of plans will be more flexible. The valuation of plans will not be assessed on the standard solvency basis but rather will be based on a broader basis.
If a membership or an employee is terminated, the termination value will stay in the plan until retirement, death or breakdown of marriage or common law relationship. The termination value is the value of the base benefit and all owing ancillary benefits.
Employers will not be eligible to be an Administrator of the Plan (s. 100.5)
The administrator of a shared risk plan will be:
- a trustee;
- a board of trustees; or
- a non-profit corporation.
The administrator is independent and the “sole obligation and fiduciary duty of the trustee is to carry out the purposes of the plan.”
The term of office of the administrator is three years. Only the Superintendent of Pensions can remove the administrator during the term.