Canadian Lawyer InHouse

19 CANADiANLAWyERMAG.CoM/iNhousE april 2014 For in-house counsel, that means a whole lot more paperwork. But it also means an opportunity to be involved with innovative pension reform strategies that will directly affect employees' lives. While transferring pension risk to an in- surance company is not a new concept, it's still relatively new in the Canadian mar- ket. But for the Canadian Wheat Board, it was the best option to help meet its benefi t promises to retirees. Last year, the CWB signed a $150-mil- lion deal to buy an annuity policy from Sun Life Financial Inc., which would transfer some of its pension risk to the insurer. The CWB lost its government monopoly in 2012 and transitioned from 400-plus em- ployees to an organization of 100. "The tran- sition did not support the type of plan we were able to operate in the old environment," says Dayna Spiring, general counsel and chief strategy offi cer for the CWB in Winnipeg. The organization had to look at de- risking as it moved into a more competitive space against large grain companies, and the CWB didn't want the risk and liability on its balance sheet. "We sought advice from all over the industry," says Spiring. "Our pri- mary concern was that we had made a com- mitment to these employees to maintain a certain level of benefi ts (so) our fi rst priority was to fi nd a solution that captured those benefi ts for them." With the annuity buy in, the CWB was able to transfer both the longevity risk (people living longer than expected) and investment risk in its DB plan over to Sun Life. The CWB also worked in an "infl a- tion-linked" promise, so the benefi t com- mitments increase with infl ation. Some of the CWB's employees qualify for this plan; the rest are on a totally sepa- rate defi ned contribution plan. The Offi ce of the Superintendent of Fi- nancial Institutions still has to approve the termination of the original plan; after that, pensioners can convert the buy in to their own annuity buyout (from the group pen- sion to an individual one). Canadian companies have done this be- fore, just not on this scale, adds Spiring. So could we start seeing more of these types of arrangements in Canada? The insurance companies think so. At the time of the announcement with the CWB, Sun Life's Brent Simmons told the Financial Post de-risking transfers could add up to a $10-billion business in Canada by 2016. THE HISTORY Typically, organizations offer defi ned con- tribution or defi ned benefi t pension plans. A DC plan involves fi xed contributions from the employee and employer, and fu- ture benefi ts will fl uctuate, depending on investment earnings. A DB plan, on the other hand, promises a monthly benefi t on retirement based on the employee's earn- ings and tenure. With a DC plan, you don't get to take ad- vantage of average mortality rates because you're not pooling that risk with anyone else, says Randy Bauslaugh, who leads McCarthy Tétrault LLP's national pensions, benefi ts, and executive compensation practice. That means, for example, you may live to 60 or to 105, but maybe you only have enough money to last until you're 83 (which is the average age people are expected to live). The issue with a DB plan, though, is em- ployers have a top-up contribution risk; if they have to put more money into the plan, they have to account for that on their fi nan- cial statements. The state of today's DB plans is not nec- essarily the result of economic volatility, though. In part, it has to do with account- ing — and how the rules have changed. "It essentially turned 30-year obligations into something you had to quantify on the bal- ance sheets every year," says Bush. And, for many organizations, that's not something they want to do. With a DC plan, your accounting is easier, says Bauslaugh, but you're not going to have a tool that will allow you to manipulate the workforce (say, to allow people to retire early). There has to be some place on the spec- trum between a DC and a DB plan with enough fl exibility so it can bend when the economic or demographic winds blow strongly. "A lot of single-employer type plans are unbendable," says Bauslaugh. That place on the spectrum would be a target benefi t plan, which takes attributes from both DC and DB plans and creates a new design that shares risk. (Target benefi ts already exist in the multi-employer world, but not in the single-employer world.) Es- sentially, with this type of plan, you're tar- geting a benefi t, but not guaranteeing it. THE NEW BRUNSWICK EXAMPLE If you have an extremely young or mobile workforce, a DC plan might be the most appropriate option. For some, the DB plan is working, but many others are struggling with cost volatility and sustainability issues due to factors such as increased longevity, changing demographics, and low interest rates, says Jana Steele, a partner in Osler Hoskin & Harcourt LLP's pensions and benefi ts group. '' our primary concern was that we had made a commitment to these employees to maintain a certain level of benefi ts (so) our fi rst priority was to fi nd a solution that captured those benefi ts for them. dayna spirinG, canadian Wheat board ''

• Cover