How Canadian employers are responding to surplus DB pension plan funds

With several Canadian defined benefit (DB) pension plans experiencing a surplus in funds in recent months, partner Stephanie Kalinowski said in an interview with Benefits Canada that many employers are interested in keeping their surplus intact as a safeguard for any future funding risk.

“Just because a lot of plans are fully funded, they’re not necessarily grossly overfunded on a wind-up basis,” she says. “Some plans that have legacy indexation or post-retirement cost-of-living benefits may be fully funded on a solvency basis but could be significantly less than fully funded on a wind-up basis.”

Stephanie also notes that many employers are considering ending their DB pension liabilities by transitioning to a defined contribution model or by purchasing a group annuity, which removes some of the financial risk associated with pension plans.

Employers could also push for a gradual reduction in contributions for plan members in legacy DB plans, she says, considering the high contribution rates for both employers and members. “I think there will be a more cautious approach but there would still be a lot of desire on the side of unions and members to reduce the contributions, if they can,” she says.

For any plan sponsors with a unionized workforce that are considering retiring their DB pension plans, collective agreements will need to be considered when reviewing their surplus, Stephanie adds.

“If the pension plan is incorporated by reference into the collective agreement, then it may be that the employer can do nothing without negotiating that with the union,” she says. “If the collective agreement language is more generous than that, then it may be that the employer has more options that it can take unilaterally, either with some notice to the union or maybe in consultation with the union, but not necessarily with the union’s consent.”

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