Tuesday, October 12, 2010

Pension Bill of Rights

On October 1, 2010, Judy Sgro (York West) introduced a Private Members Bill titled “An Act to promote and strengthen the Canadian retirement income system”. Enactment is intended to create a "Bill of Rights for a retirement income system that promotes the goals of adequacy, transparency, affordability, equity, flexibility, security and accessibility for all Canadians".

Bill C-574,It was first read on October 1st; 2nd reading is expected to take place on November 23.

Here's an abridged version of the Bill:

Every individual has the right to accumulate sufficient pension income in a retirement income plan to provide for a lifestyle in retirement that the individual considers adequate, subject to any reasonable restrictions imposed by a federal law…. reasonable restrictions do not include a restriction based on age.

Every individual shall have the right to determine how and when to accumulate pension income, except that an individual who participates in a workplace plan may be required by that plan to save for retirement.

Every individual shall have the same opportunity to accumulate pension income as any other individual, without regard to age, sex, national origin or occupation.

Every individual who participates in, contributes to or receives benefits from a retirement income plan should be entitled to receive full disclosure of any material risks to the individual under the plan, including non-payment or reduction of benefits, and of the options available in the event of the non-payment or reduction of benefits.

Every individual shall be entitled to receive investment advice from an advisor who has no conflict of interest in terms of providing advice.

Every individual who participates in a retirement income plan shall be entitled to receive, in clear and concise language, all the information the individual requires to understand his or her rights, obligations and choices, including regular disclosure of all costs, regular disclosure of investment gains or losses pertaining to the individual’s entitlement, timely information regarding investment options and timely disclosure of any options or elections available to the individual.

Every person that administers a retirement income plan shall exercise the standard of care a prudent professional would exercise; may retain professionals to assist in the administration; and shall appropriately supervise the work performed by such professionals.

Every federal law that governs the establishment or operation of a retirement income plan shall promote individuals’ access to training in financial literacy and retirement planning.

Every federal law that directly or indirectly applies to a retirement income plan shall be interpreted, construed and applied so as to promote and give effect to the principles and rights set out in this Act.

The Bill is interesting for a number of reasons, but principally as is may present a preview of the Liberal Party's pension policy should they have the opportunity to form the next government.

Here's a few thoughts on the Bill and its implications:
  • pension legislation is generally within the purview of the provinces, except for industries falling under OSFI and tax rules under the CRA. The Bill is limited to matters falling under the Parliament of Canada, so it is likely limited to tax issues, pension plans of federally regulated industries and RRSPs.
  • the Act gives the right to accumulate sufficient pension income subject to any reasonable restriction imposed by federal law that is not based on a personal characteristic, such as age. This could be achieved by setting a lifetime contribution limit for tax deferred retirement savings. The person could then use this limit up as funds are available. The CRA could impose annual maximums on contributions, however it would have to prove that doing so would not unreasonably limit an individual's plan to achieve an adequate retirement income. Given that age must be taken out of the equation, this may be hard for them to do. This would be a major change in our system.
  • the individual is entitled to disclosure regarding the material risks to the individual under the retirement plan. This sounds good but in practice may be challenging. Material risks could include all the various investment risks, mortality risks, inflation, variations in expense levels, value splitting on marriage breakdown, corporate bankruptcy, membership declines within negotiated plans, target benefit valuation failures, fraud, and on and on. Lawyers will love this one.
  • there are a variety of disclosure requirements. These would generally reset pension plan regulation under a financial instrument model. The disclosures sound similar to those required of insurance companies or of other financial instruments. This could be good for the consumer but, this type of model has not been adopted by any provincial or federal jurisdiction.
  • the Bill requires any federal law connected to retirement income plans to promote training in financial literacy and retirement planning. This would force the CRA take on a training role that it doesn't assume in any other circumstance.
  • the requirements for risk disclosure, investment advice, broad financial information and training will complicate pension plan administration and may significantly increase trustee liability. These could be handled by safe harbour rules, but the changes would be a significant jolt to the system. Sponsors may bail out and close plans.
The bottom line - if the Act passes, a government sponsored supplementary pension plan may be needed as a private plan substitute, as corporations speed up the closure of their plans. A lifetime contribution limit, replacing current annual limits, may be a plus.