Advisory: 2009 in review
This issue of Exchange looks at 2009’s key legislative, regulatory, investment and judicial developments in employee benefits and pensions.
Communications consultant Steven Laird is the editor for Buck Exchange. He works with an advisory board with representatives from each of Buck’s consulting practices: Health & Productivity, Retirement, Investments & DC Plans, Communications, Global HR Technology, and Research & Compliance.
Feel free to comment on any of these stories; comments will be posted after a brief review. Or you can contact the editor directly at
steven.laird@buckconsultants.com. Steven will direct your questions and comments to the appropriate consulting practice for response.
Investments and CAP
Health and Productivity
Retirement
IFRS
Investments and DC Plans
It takes more than one good year to recover
Returns for 2009 are shown below. The fourth-quarter returns for 2008 had a negative spillover effect on the first couple of months of 2009, so they’re shown as well. Although January-February 2009 weren’t a strong start to the year, the rest of 2009 was a very good year for Canadian markets and a decent year for foreign markets. Still, the strength of the Canadian dollar through 2009 against virtually all other significant foreign currencies, including the $US, Euro and Yen, did not help unhedged Canadian investors.
The 2008-2009 two-year (annualized) results demonstrates that it takes more than a good year to erase the damage caused by a serious financial meltdown.
While we don’t advocate market timing, we do know that rebalancing during particularly volatile times improves the risk-return profile of the investor. True, rebalancing is not a significant benefactor during normal markets, and is even a modest cost drag on the investor due to transaction costs. But this is like saying you only need an alarm after someone breaks in.
As an illustration, we ran a passive 40% Canadian bonds + 30% Canadian equity + 30% Global Equity asset allocation through our return generator to show the difference between quarterly rebalancing (i.e. a simple, regular rebalancing program), and no rebalancing:
Over the longer term, the advantages of setting up and running a regular rebalancing program will outweigh its disadvantages.
Health and Productivity
Bill 102 hits home – and private plan sponsors take the brunt
Three years ago, Ontario passed Bill 102, the Transparent Drug System for Patients Act.
This past year saw the fallout of this legislation, and it doesn’t bode well for private plan sponsors. Ontario lowered the amount to be paid for generic drugs under the Ontario Drug Benefit (ODB) Plan. As a result, private plan sponsors have seen their generic drug costs increase as pharmacies began charging higher prices to private plans to compensate for lost revenue from the ODB deal.
What came to light is that pharmacists are engaging in two-tiered and sometimes three-tiered pricing of prescription drugs. Private plans are being charged more than the public plan, but those that use pay-direct networks do have upper limits on ingredient cost payments. The highest prices are paid by the uninsured consumers and those whose drug plans operate on a reimbursement basis, since there are no systems in place to limit drug costs.
In an unprecedented move, General Motors (GM) and Chrysler joined forces and, in partnership with Green Shield, negotiated deals with the manufacturers of nine brand name drugs, lowering their cost below the generic equivalents, in exchange for an exclusive listing on their plan formularies. This is the first time we have seen a private plan sponsor negotiate directly with a drug manufacturer for exclusive inclusion in their drug formulary.
But few employers have the bargaining power to achieve what GM and Chrysler did.
The expectation is that other provinces will enact similar legislation, leaving private payers even more vulnerable to cost increases.
At the very least, the drug pricing changes have enlightened private plan sponsors to the opportunities that exist in reducing drug costs. There will be increased pressure on carriers, pharmacy benefit managers and even government to drive costs down for the private payer and level the playing field for all residents.
Mental Health Issues Drive Canadian Wellness Strategy
Improving productivity by keeping employees healthy and at work is emerging as the top business objective for employer-sponsored wellness programs around the world. The most powerful drivers for wellness strategies among Canadian employers are mental health issues; stress, work/life balance, and depression top the list.
These are among the latest trends identified by Buck Consultants’ third annual global wellness survey, “WORKING WELL: A Global Survey of Health Promotion and Workplace Wellness Strategies”.
The most powerful driver behind wellness strategies in Canada is stress, cited by 45 percent of Canadian respondents as the top health risk they are addressing in the workplace. Other important issues for Canadian employers are work/life issues (39 percent) and depression (31 percent).
“We have seen dramatic increases in absence due to stress, depression and anxiety” said Michele Bossi, Buck’s Health & Productivity practice leader in Canada. “In working with clients I’ve found that mental health issues are more powerful drivers of wellness strategy than physical health issues.”
A copy of the full international survey is available at www.bucksurveys.com
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Dramatic upswing in drug cost trend
2009 saw the first increase in drug plan pricing trend following a 4 year decline. Insurers increased their premium rates for drug plans by an average of 15.19%, according to Buck’s 2009 Canadian Health Care Trend Survey, our ninth annual study which analyzes the trend factors used by 11 major Canadian insurers in the pricing of their health and dental benefit plans.
Prescription drug costs still represent the largest portion of employer health care costs. “Medications for the treatment of cancer, depression, rheumatoid arthritis and cardiovascular conditions in an aging workforce are the main contributing factors to this upswing,” said Michele Bossi, Leader in Buck’s Health and Productivity consulting practice.
“Perhaps the most immediate impact on the rate of total health care cost increases in Canada may be nervous employees facing an economic downturn and taking advantage of every benefit offered to them during this time of uncertainty,” said Bossi. Many employers, having already implemented plan design changes to curb cost trends, are beginning to shift to a proactive approach to health care cost containment.
The complete survey report is available at: www.bucksurveys.com or visit www.acsbuckcanada.com and click on Publications > Surveys. Look for our 2010 survey in the spring.
Group Benefits Legislation
Alberta de-lists chiropractic services The Alberta government joined the ranks of six other provinces, including Ontario and Quebec, in announcing it will no longer provide coverage for chiropractic services. Previously, the province provided up to $200 annually, per patient, for these services.
For private plans, the cost impact of this change is expected to be between 1 and 3 percent of total health care costs (including drugs).
Changes to the Quebec Insurance Act Regulations On September 10, 2009 changes to the Quebec Insurance Act expanded the life insurance conversion privileges for Quebec residents covered under group life insurance programs.
The changes are summarized below:
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Dependent children are now eligible for conversion
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All conversion is subject to a minimum amount of $10,000 per member and a minimum of $5,000 per spouse or dependent child
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The maximum amount that can be converted is $400,000 (up from $200,000). This applies to member, spousal and dependent child life benefits
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If the death of an insured occurs within the 31-day conversion period, the benefit payable is the full amount of life insurance coverage as outlined under the group insurance contract.
B.C. Court: No “premium-free” ride for Public Service retirees
On October 1, 2009, the British Columbia Supreme Court released its decision in Bennett v. British Columbia. This case involved a class action brought by retirees relating to changes to post-retirement health care benefits that were available through the British Columbia Public Service Pension Plan.
Up until January 1, 2003, the plan provided retired members with extended health benefits and premium-free medical benefits. Effective January 1, 2003, the government implemented changes that increased the deductible for extended health benefits, and required retirees to pay a portion of the premium for medical benefits.
The retirees claimed that the changes made by the government constituted a breach of contract and a breach of fiduciary duties. The B.C. court dismissed both claims made by the retirees.
The retirees relied on various documents to make their case that the changes to the post-retirement health care benefits constituted a breach of their employment contracts. Retirement letters, brochures, information sheets, booklets, application and notice forms all made reference to “premium-free” benefits. But the court rejected this argument since these documents were not given to the employees until long after their hire date and there was no new “consideration” provided by the employees (i.e. something of value provided by the employees in exchange for the benefits). Furthermore, the court found that the post-retirement benefits were never guaranteed under any legislation but rather were subject to the government’s discretion. Thus, the post-retirement benefits at issue were not vested in the retirees, at their date of hire or at time of their retirement.
The court also ruled that the government did not have a fiduciary duty to provide premium-free post-retirement health benefits for the life of the retirees. Therefore, the changes didn’t constitute a breach of fiduciary duty. The court found that it was not reasonable for the retirees to expect the government to act in their best interests potentially at the expense of the public interest or the interests of other pension plan members.
Retirement
Ontario gives plan sponsors a break
In 2009 Ontario brought some temporary breathing room to hard-hit sponsors of defined benefit plans, with the introduction of solvency funding relief measures. Pension plan assets took a serious beating in 2008, with returns averaging around -16%. Many companies with valuations due for 2008 would have faced significantly increased cash funding requirements were it not for these measures. Full details can be found in our July 2009 Advisory, but in broad strokes the measures gave sponsors three options:
- Defer any new special payments for up to one year. Sponsors who were dealing with solvency deficiencies even before the 2008 market decline were facing an additional special payment from 2009’s poor investment experience – for a $50 million fund, this would have meant a special payment of over $2 million.
- Consolidate existing solvency special payment schedules into a new five-year payment schedule. This choice very much depends on the existing special payment schedules. Sponsors with large special payments set up a few years ago benefit most from this consolidation.
- Extend any new solvency special payments over ten years instead of five, as long as plan members consented. By doubling the amortization period for the funding of new special payments, this effectively cuts the special payments required under Option 1 in half. Getting consent is the tricky part. Notices must be sent to all plan members in the prescribed manner, and this option will not be permitted if more than a third object. While it may be possible to convince employees that giving consent is in their best interests, pensioners and other inactive members no longer have the employment relationship that binds them to the plan sponsor. A vocal and involved retiree population may be a tough group to convince and could scuttle a plan sponsor’s attempt to take advantage of this measure.
Ontario’s solvency relief measures have been broadly welcomed by plan sponsors who are under a lot of financial pressure. The measures allowed the 2009 market upswing to partially offset 2008 losses without requiring employers to begin funding those losses in 2009, which was the whole intent. The measures are not without risks though. Lower payments now will likely mean higher payments later on, and there is no guarantee that the sponsor’s ability to pay will be greater down the road. As Buck CEO Cameron MacNeill counseled in a recent Benefits Canada article, without prudent governance and proper consideration of the potential consequences of availing themselves of these relief measures, plan sponsors could be “playing Russian roulette with a loaded gun.”
GST/HST rebate can be transferred to employer
New rules for claiming a GST/HST rebate on pension plan expenses now apply for your first fiscal year starting on or after September 23, 2009 and for the claim periods of pension entities beginning on or after September 23, 2009.
The actual mechanics of claiming the GST/HST rebate on plan expenses under the new rules will depend on whether the obligation to pay plan expenses falls to the employer or the pension fund. But in the end, the pension fund will be eligible to apply for a rebate of 33 1/3% of the deemed GST/HST applicable to invoiced plan expenses.
However, a GST/HST registrant employer and the pension fund can jointly elect in writing to transfer up to 100% of the GST/HST claim to the employer to use as a deduction (not a rebate) from the employer’s net tax position. The employer will need to be able to show that the pension plan expenses were acquired in the course of exclusive commercial activities during the year, otherwise the amount of the rebate transferrable will be restricted.
The ability to transfer the GST/HST claim from the pension plan to the employer could be viewed as a reversion of plan assets. Therefore, employers may wish to consult their legal advisors to clarify this point for their own situation.
Based on various conversations with government representatives dealing with excise tax assessments, we understand that a new information bulletin providing practical information on how to make a claim is expected to be released in the second quarter of 2010 and that claims can be made twice a year – at the end of the 2nd quarter and the 4th quarter.
Some important points to remember about the new GST/HST rules are:
- They will apply to GST/HST paid on investment management fees as well as non-investment related expenses.
- They will apply to trust-based defined contribution pension plans only, not insurance-based plans.
We strongly recommend that employers speak to their Canadian accountants at the earliest opportunity in order to determine the impact this proposed legislation will have on their tax position.
Pension reform: “Change is all around us…”
Federal On October 27, 2009, the Federal Department of Finance announced extensive changes to address the modernization of the federal pension framework. The proposed changes which will impact plans governed by federal pension benefits legislation touch on a multitude of topics including:
- Enhanced protections for plan members
- Reduced funding volatility for plan sponsors
- Solutions for plan-specific funding problems
- Defined contribution pension plans
- Negotiated contribution defined benefit pension plans
- Pension fund investment rules
While some of the proposed changes will be implemented quickly through regulation, other changes will require legislative approval by the Federal Parliament. So far, legislation has not been tabled in Parliament.
For a more in-depth analysis of the proposed changes, visit our website and read our Advisory titled “Reform for federally-registered pension plans: The next building block to pension reform in Canada”
Ontario The Province introduced legislation in early December 2009 that, when passed, will implement the first phase of major pension reforms. Many of the proposals are drawn from the 2008 Ontario Expert Commission on Pensions (OECP) report that promoted a fair and balanced approach to providing secure and affordable pensions.
At a glance
- Partial wind-ups are proposed to be eliminated elimination on December 31, 2011
- Once partial wind-ups are eliminated, surplus distribution would be required only on a full wind-up
- Grow-in rules will be extended to all employees terminated by an employer (other than for cause) after 2011
- Vesting of benefits will be immediate
- Asset transfers between defined benefit pension plans will be clarified and simplified
- There will be increased disclosure and access to information for active, former and retired members
- Enhanced powers will be given to the Superintendent to deal with at-risk pension plans
- Phased retirement benefits will be allowed to be paid for Ontario plan members
While the effective dates for some of the larger reforms have already been put forward, most of the changes will be enacted once the legislation is proclaimed by the Province. It is unlikely that these changes will be proclaimed in 2010, especially given that a second phase of reform is expected in the spring of 2010.
Ontario is the first province to table pension reform legislation. In 2010, we can expect to see pension reform measures introduced by Alberta, British Columbia and Nova Scotia. Also, Manitoba has resurrected the pension regulations required to implement their pension bill passed in 2004, while Prince Edward Island has announced it too will move in 2010 towards minimum pension standards (20 years after it first adopted its pension bill – a bill that was never proclaimed).
The key phrase from a legislative pension perspective for 2010 is going to be “change is all around us”.
Pension division Bill 133 amended the pension division rules under the Ontario Pension Benefits Act and received Royal Assent on May 14, 2009, but the changes will not become effective until the Regulations have been revised, expected sometime in early 2010.
The three most significant changes to the pension division rules are:
- For members who have not yet retired, the pension division can be done immediately once a court order or domestic contract is filed. Under current rules, for active members, the division has to wait until the earliest of the member’s termination, attainment of normal retirement age, and death
- Members and spouses will have a right to request a statement from the plan administrator setting out the imputed value” of the member’s pension
- The legislation will prescribe the manner in which the “imputed value” of the member’s pension is to be calculated for the purposes of the statement
The new rules will affect all pension plan members employed in the province of Ontario. The current rules will continue to apply to court orders and agreements that have already been filed with the plan administrator, and to court orders/agreements that were made before the regulations came into force.
Supreme Court of Canada: DB surplus can be used for DC plan
On August 7, 2009, the Supreme Court of Canada released its decision in Elaine Nolan et al. v. Kerry (Canada) Inc. The primary questions in this case were whether a pension plan may be amended to allow payment of expenses from the trust fund, where it was previously silent on this matter; and whether surplus under the defined benefit (DB) component of a pension plan may be used to pay the employer’s contribution obligations under the defined contribution (DC) component of the plan.
In dismissing the employee-formed Pension Committee’s appeal of the Ontario Court of Appeal decision, the Supreme Court of Canada arrived at the following conclusions:
- Pension plan expenses may be paid from the pension plan provided that (a) legislation does not prohibit it, (b) the plan documents don’t require expenses to be paid by the employer, and (c) they are reasonable and bona fide expenses necessary for the integrity and continued existence of the plan
- An employer is entitled to take contribution holidays (use surplus to fund the employer’s contribution obligations) unless the terms of the pension plan do not permit contribution holidays either explicitly, or implicitly by removing actuarial discretion
- An employer may use a surplus under the DB component of the pension plan to satisfy its funding obligations under the DC component of the plan if there exists one trust under which all DB and DC members are beneficiaries
For a more in-depth analysis of this decision, visit our website and read our Advisory titled “A closer look at the Kerry decision: Clarity and direction for stakeholders“.
IFRS
Time to gear up
The Canadian adoption of international accounting standards for publicly accountable profit-oriented organizations is under way: here’s where things stand now, and the impact you can expect on your benefits accounting.
The first annual report under International Financial Reporting Standards (IFRS) is due after January 1, 2011. Since a comparative year must be included in the first IFRS report, the date of transition will be January 1, 2010 for many companies.
The adoption of international standards has required the review of other accounting standards that also cover employee benefits.
- The Public Sector Accounting Board (PSAB) requires that Government Business Enterprises (GBEs) adopt IFRS effective January 1, 2011 with optional use by Other Government Organizations (OGOs).
- In December, the Accounting Standards Board (AcSB) released standards for private enterprises.
- Not-for-profit organizations can continue to use the current standards, but they should expect future changes.
- Pension plans that reported under CICA 4100 can continue to use this Canadian GAAP rather than the international standard, but the AcSB is reviewing this standard.
Companies participating in multi-employer pension plans (MEPPs) will have to account for their MEPP as a defined benefit plan instead of a deefined contribution plan if the employers are obligated by legislation to fund a MEPP deficit. Most companies with Quebec employees in a MEPP will be faced with the new accounting, but some Ontario employers may be surprised to discover they too have to account for their MEPP under the defined benefit rules.
Companies reporting employee benefits under the current Canadian standard 3461 will get a chance to restart their accounting under the international standard. Many will recognize all unamortized gains and losses at the date of transition. This decision is independent of how future gains and losses can be recognized.
A company’s current policy for recognizing of gains and losses can be changed. Many may decide to continue with deferred recognition, which is allowed under current IFRS. However, immediate recognition is also allowed. In considering how and where to recognize gains and losses, companies will need to consider where they want volatility — in the balance sheet or in the income statement.
One of the main impacts on many Canadian pension plans will be in the application of the IFRIC14, the new interpretation of the accounting standard for employee benefits (IAS 19). It requires that a liability associated with minimum required funding will be recorded as an additional liability. Pension plans with large solvency deficiencies may create additional liabilities on sponsors’ books due to the minimum required solvency funding. IFRIC14 may lower any surplus or increase any deficit a company is currently reporting on its balance sheet.
Canadian subsidiaries of US companies will continue to report under the US GAAP, however the US and International accounting bodies are working to converge their standards. When the US adopts the international standards, these Canadian subsidiaries will have the opportunity to review their recognition of gains and loses and the impact of IFRIC14.
US GAAP has been revised to require greater disclosure of asset risk, more extensive descriptions of assets, and the assumed return on assets. Companies with funded employee benefits, such as pension plans, will need to review their description of their asset classes. For example, we expect that language will be needed to describe the Refundable Tax Credit for companies with a Retirement Compensation Account (RCA).
And as Canada adopts international standards, the IASB continues to review their standards. We expect that any final decisions for employee benefits are a few years away. However, the trend is towards immediate recognition of all gains and losses. Also being reviewed is where the components of the pension or benefit cost should be recorded. While there may be minor changes before the end of 2011 there will not be any major change, which makes the switch-over for Canadian companies easier.
Canadian actuaries are reviewing how to determine the discount rate for valuing employee benefits. All the accounting standards require using bond yields to set the discount rate. Canada is a small market and there is a shortage of long-term good-quality corporate bonds. The Canadian Institute of Actuaries is expected to release a document early in 2010 with guidance on setting the accounting discount rate. International standards require the use of government bond yields when a corporate bond market is slim, so the CIA guidance is welcome.
Communications, Global Perspective, Health & Productivity, Investments & DC, Legislative Update, Retirement, Technology, Uncategorized
