Bill C-27 could mean changes for DB pensions

Last April, the Department of Finance unveiled Bill C-27 on pension reform and it’s been winding its way through the House of Commons. Lately, it’s been getting a bit of interest because some parties see it as a threat to much-loved Defined Benefit (DB) pension plans for federal government workers and Crown Corporation employees, (such as Canada Post, CBC, Via Rail, etc.). Here’s what you need to know as interest in Bill C-27 starts picking up steam.

What is Bill C-27?

Bill C-27 is an Act to amend the long-standing Pension Benefits Standards Act. Those in favour of pure Defined Benefit (DB) pension plans have criticized Bill C-27, saying it would allow federally regulated employers to replace DB plans, which provide a guaranteed retirement income for life with no risk, with Target Benefit Plans (TBPs) which are also generous pensions but because they count on employees taking on some risk, final retirement guaranteed payments may not be as iron-glad.

What happens if it’s passed into law?

It would allow federally regulated private sector and Crown Corporation employers to offer a TBP to their employees, or to convert an existing DB pension plan into a TBP. Malcolm Hamilton, a retired actuary, believes Bill C-27 would allow for tiny steps in the right direction. “There are valid concerns that these DB federal pensions are unsustainable and the government wants to do something about it,” says Hamilton.

Who is for or against the changes?

Federal employees and their unions want to keep their federal DB plans as they are and will fight to do so. But this legislation helps envision a future for federally regulated pension plans that falls between the DB and Defined Contribution (DC) pension plan spectrum.

What’s the difference between TBP, DB and DC plans?

TBPs can place explicit limits on the volatility of employer contributions. So if a funding deficit arises in a TBP (because of underfunding, or lower-than-expected investment returns, say), part or all of it can be compensated for by reducing accrued benefits to employees whereas a traditional DB plan would require the entire deficit to be funded by increased contributions on the part of the employer—the federal government (and by extension, the taxpayer).

Less desirable than either DB or TBP plans are DC plans, which are mostly self-directed by the employees who own them. (If you have a pension with your employer you likely have one of these.) That means that contributions are completely fixed and mostly paid by the plan holder, and there’s a lot of uncertainty as to what retirement income payouts will be because that depends entirely on the way you managed and invested your DC pension money over time.

Are there payout risks to federal employee DB plans now?

No. Pension retirement income for employees with these federal plans is often fixed, regardless of the plan’s market performance. If there is any financial risk to the holders of these pensions, it is in the indexation of benefits. So the TBP is really a hybrid between DB and DC plans, with more variability in benefits for members than federally regulated DB plans but much less than DC plans.

Why is this happening now?

Several countries have already done away with these unsustainable federal DB plans which is why the federal government, through Bill C-27, may want to tinker with them—even on a very small scale. But federal public service unions are pushing back. “It’s such a good deal for them and the unions sense it, so they go berserk any time there’s a suggestion they’ll be moved in a sensible direction regarding these pension entitlements,” says Hamilton. “What they have now really shouldn’t exist.”

What’s next?

The feds prefer to see these DB plans slowly move to TBPs. As Bob Baldwin, a member of the C.D. Howe Institute’s Pension Policy Council succinctly explains in the association’s December 19 report, “A regime in which accrued benefits cannot be reduced places all financial risk on young and future plan members. Target benefit plans, such as multi-employer plans, avoid these problems by giving to the middle of the spectrum and spreading the risk sharing across all cohorts.”

But the truth is that while taxpayers want changes (since they often pay the difference for underfunded or underperforming federal plans at retirement time) unions don’t. “Unions will probably have to be brought kicking and screaming into the conversation,” says Hamilton. “But this pension set up where taxpayers take all the risks and employees take none is very unusual. The time for change is surely coming—albeit slowly.”

Stay tuned for what happens next, coming later this year.

—This article was updated 01/09/16—

Read more:

• What’s the difference between DB and DC pension plans?
• When to tap into government pensions
• Should I combine my defined benefit pensions?