New Brunswick Amends Pension Benefits Act
On May 31, New Brunswick introduced Bill 63, An Act to Amend the Pension Benefits Act, which establishes an optional new program structure available to pension plans registered in New Brunswick. This legislation represents the culmination of the work of the Pension Task Force, appointed in December 2010 to review pensions in New Brunswick, and has the objective of improving the security, sustainability and affordability of the pension system. The new approach is designed to be very transparent while improving the equity among all relevant parties. The following principles guided the work of the Task Force:
- pension plans must be able to pay benefits for members today and for those members who will retire in the future;
- there should be no advantage to retiring before any changes are made to the plan;
- pension amounts earned up to any agreed-upon revisions will not be decreased;
- any changes will be incremental and implemented on a go-forward basis; and
- the plans must be fair to employees at all stages of their career as well as to retirees.
The result of this process was the development of Shared Risk Pension Plans (“SRPs”). SRPs are a unique take on the traditional defined benefit pension plan and are modeled after a design that has been evolving in the Netherlands for over 15 years but with the benefit of several years of experience and extensive stress testing based on current Canadian and global market conditions. In short, a SRP provides a modest initial benefit promise based on career average earnings and no post retirement indexation but is funded at a level where future surpluses are expected to be adequate to pay for substantial inflation adjustments for plan members both before and after retirement. A portion of surpluses generated must be used to enhance benefits for all plan members through inflation adjustments and the balance held in reserve to protect the long term security of the program. Contribution holidays are not allowed unless mandated by the ITA. The contribution rate, benefit level, investment strategy and related aspects of plan operations are subject to a stringent risk management process, including annual valuations. This approach is targeted to achieve the consistency in contribution rates that many plan sponsors find attractive in defined contribution programs while maintaining the high level of benefit security that employee groups typically value in more traditional defined benefit programs. Key aspects of SRPs include:
- Shared contribution – known in advance
- Clear funding guidelines – clear rules detailing how funding levels are established
- Sound investment policy – focused more on security and less on “chasing returns”
- Robust risk management – high probability (75%+) that targeted goals for inflation enhancement of benefits will be achieved and very low probability of benefit reduction (<2.5%)
- Clear disclosure to members – the “pension deal” is explicit and false promises are avoided
- Managed by independent board of trustees – independent operation within rules set when plan is established
The legislation permits both public and private sector programs to adopt the SRP model, subject to satisfying minimum criteria including demonstration that the program fulfills the guidelines for a high probability of success and a very low likelihood of the funded position deteriorating to the point where benefit reductions are required to protect the program’s financial security. There is also a specialized termination benefit calculation targeted to maintain equity between members who leave and those that remain in the SRP.
It should be noted that the conversion to the SRP model also includes benefits payable in respect of past service, including existing retiree pensions. Thus existing pensions which have indexing “guarantees” can be converted to a SRP under which future indexing of all pensions is conditional on the plan’s funded status. This is a unique approach as most other jurisdictions have treated all benefits in respect of past service (including future indexing for inflation) as crystallized and have required that any rebalancing of program costs be achieved by amending only future service accruals or contribution rates. An exception to this is Nova Scotia Public Service Superannuation Plan which was amended in 2010 to make all indexing after 2015 (including existing pensions in pay) conditional on the plan’s funded status and was further revised earlier this year to implement a jointly trusteed target benefit design.
Four unions representing New Brunswick public sector employees plus one private sector program were heavily involved in the consultation process leading to the SRP design and have already signed on to convert their plans to the SRP model. The NB Government has announced that it is their intention to engage in similar consultations with the balance of public sector employees in the province.
Regulations spelling out details regarding the operation of SRPs have not yet been released.