Included in Discovery: Atlantic Education & the Law – Issue 10

Hannah Brison and Dante Manna

Increased financial volatility caused by recent global events has caused public sector defined benefit (“DB”) pension plans to reflect on their liquidity and vulnerability to sharp market downturns.¹ Along with financial markets, job markets have also been volatile of late, with employers facing recruitment challenges and increasing turnover as workers adjust their priorities, which they may not see as aligned with their DB pension benefits.

In turn, many employers and plan sponsors are now confronting their long­term fiscal challenges, as well as employee retention considerations, and reviewing their plans for potential changes. Such review requires balancing sustainability and the evolving needs and interests of members and other beneficiaries, considering differences in plan demographics, including:

• active, deferred, or retired status;
• age, gender, or other protected human rights grounds;
• part-time, full-time or other employment status; and
• different family structures and marriage or relationship breakdown circumstances.

To better understand how such considerations are balanced in practice, in January and February of this year, we undertook a comprehensive study of 20 Canadian public and quasi-public sector DB plans (“Public Sector Plans”),² which were comparatively reviewed for 14 different characteristics.³ We also reviewed relevant provisions in pension benefits legislation in each Canadian jurisdiction (collectively referred to as “PBSA”) for further context.

Our review has revealed a number of areas in which public sector plans may change or have changed to support plan sustainability and the evolving needs of members.

Selected DB Plan Trends

Our findings with respect to trends on five issues of note are briefly discussed below. We invite readers to contact us for more details, or for o Increased financial volatility caused by recent global events has caused public sector defined benefit (“DB”) pension plans to reflect on their liquidity and vulnerability to sharp market downturns. ur findings on other issues

1. Membership eligibility for non-full-time employees

There are a host of reasons why an individual may need, or elect, to work in other than full-time employment, whether it be unavailability of full-time positions, childcare obligations, personal preference, or the pursuit of further education. Statistics Canada data provides that in 2017, nearly one in five employed Canadians (3.5 million people) were working less than 30 hours per week and in 2021 (although this is a long-standing trend) women were almost twice as likely as men to work part time (24.4% compared to 13%⁴).

While full-time workers are generally required to participate in their pension plans once the applicable eligibility requirements have been satisfied, part-time workers must satisfy minimum specified thresholds to access membership eligibility, that is either optional⁵ or mandatory⁶, depending on the public sector plan.

The approach taken by most public sector plans is to allow or require a part-time employee to join the plan if they earn a specified percentage of the year’s maximum pensionable earnings (“YMPE”) (25-50%) and/ or they work a specified fixed number of hours (typically 700) in two consecutive calendar years. PBSA legislation similarly imposes minimum thresholds for part-time employees: two years of continuous service, earnings of at least 35% of the YMPE, and/or 700 hours of employment.

Public pension plans have taken different approaches to extending membership eligibility to casual, seasonal, or other non-full-time employees. Some plans have established unique threshold criteria for these employees; other plans apply the same earnings and hourly thresholds to all non-full-time employees, whether part-time, casual or seasonal.

Equity considerations include:

• Disproportionate use of non-full-time employment by women or other protected groups
• Projected impact of new membership eligibility criteria on ability to fund current member benefits

2. Designated beneficiaries of pre-retirement death benefits

Pre-retirement death benefits are triggered if a member passes away prior to retirement. The majority of public sector plans reviewed provide some version of the following distribution of benefits upon the pre-retirement death of a member:

1. the surviving “spouse” (includes married or common-law spouse) receives all or some proportion of the commuted value of the member’s pension;
2. if there is no surviving spouse, designated beneficiaries (or dependent children) receive all or some proportion of the commuted value of the member’s pension; and
3. if there is no surviving spouse or designated beneficiary, the commuted value of the member’s pension is refunded to the member’s estate.

This approach is consistent with PBSA pre-retirement death benefits.

Equity considerations include potential inequities between married and unmarried plan members, and how that may be affected by providing equivalent entitlements to designated beneficiaries as is provided to surviving spouses.

3. Increased options for survivor benefits and single life pensions

Most public sector plans, as well as most PBSA provisions, provide survivor benefits to a spouse upon the death of a retired plan member. Recent changes to such provisions include evolving definitions of spouse; apportionment of the benefits between a pre- and post-retirement spouse; and form of pension options.

a. Definitions of “spouse”

Public sector plans have moved toward increasingly broad definitions of “spouse” for purposes of survivor benefit eligibility, with the most inclusive definitions capturing:

1. married spouses (provided they are not living separate and apart);
2. common-law partners (in a conjugal cohabitation relationship for not less than one year); and
3. common-law partner “of some permanence” if the member and common-law partner have a child together.⁷

Other plans are more restrictive in their treatment of common-law partners, often requiring cohabitation for a minimum of three years⁸ in all instances or if one partner is married.⁹

b. Apportionment of benefits between multiple “spouses”

The most common approach taken by public pension plans is to deem the spouse at the time of retirement the “surviving spouse” entitled to receive survivor benefits. However, other plans are more flexible, allowing members to designate a new post-retirement spouse to receive survivor benefits, which may be subject to one or more of the following conditions:

1. the member elected a single life pension with a guarantee; or
2. the member elected a joint-and-survivor benefit and either
   1. did not have a spouse or beneficiary at the date of retirement¹⁰; or
   2. was predeceased by their retirement-date spouse.

Spousal waivers are also commonly permitted or required for an eligible spouse to waive their portion of a survivor benefit in favour of a former or more recent spouse.

c. Form of pension

Public pension plans are increasingly offering single life pensions as an option for members without eligible spouses or whose eligible spouses waive¹¹. The majority of public pension plans offer members a choice of joint-and-survivor pension and/or guarantee options. The amount of survivor benefits provided, varies from 60% to 100% of the deceased member’s pension (although 100% is rare – the maximal option is often 75% or 80%)¹². Guarantee options, when offered, typically include 5, 10 and 15 years.

Equity considerations include:

• a pension plan’s ability to reflect modern family dynamics, and how that may be affected by an expanded definition of “spouse”, or increased ability for post-retirement spouses to become eligible for survivor benefits
• the potential inequities between single plan members and plan members with a spouse, and how that may be affected by an enhanced guarantee and/or single life pension option

4. Changes to indexation

Faced with increasing inflation, a plan’s ability to deliver indexing in retirement is a key focus of retirees and those contemplating retirement.

In light of the associated costs, many public pension plans have eliminated guaranteed indexing in favour of discretionary indexing that is based on an articulated metric (e.g., the plan’s funded ratio in relation to a predetermined threshold). Public pension plans that review indexation periodically typically do so annually.

Equity considerations include:

• the effects of variable indexation on retired members versus increased contributions on active members
• the effects of any non-discretionary thresholds for suspension and reinstatement of indexation on the volatility of the plan’s funded ratio
• the projected effects of prescribed indexing on the long-term sustainability of the plan, in light of current inflation rates

5. Integrating CPP enhancements into the benefit

Recent enhancements to the Canada Pension Plan expanded CPP retirement benefits with the ultimate goals of replacing one-third of average work earnings received, as opposed to one-quarter, and increasing the maximum limit of average work earnings by 14%.

As of yet, no public sector plans have announced plans to further integrate the CPP enhancements by introducing corresponding reductions in the plan’s defined benefits; however, this will be something to watch moving forward.

Equity considerations include:

• the effects on an employee’s personal finances of enhanced employee CPP contributions plus any employee pension contributions required under the plan
• equities related to the timing of increased integration and corresponding decreases in plan member contributions

Conclusion

Adjusting DB pension benefits in light of the developing landscape in the public sector and PBSA minimum standards is paramount in order to attract and retain talent and ensure the sustainability of the plan. As shown by the trends discussed above, there are a variety of potential approaches. As is recommended, we expect each DB plan will be amended based on the needs of its members, an actuarial projection of short- and long-term effects on funding status, and a legal assessment and advice on implementation.

Nevertheless, we hope the preceding discussion will lend some insight and motivate conversation – How does your plan measure up to the trends noted above? We are always happy to participate in that conversation or provide additional information based on our research – please contact us for more details.

This update is intended for general information only. If you have questions about the above, please contact a member of our Education Group.

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¹ Jean-Pierre Aubry, “2020 Public Plan Investment Update and COVID-19 Market Volatility”, Center for Retirement Research at Boston College, Number 73, September 2020.
² The public sector plans included in our study were: Nova Scotia Teachers’ Pension Plan (“NS Teachers”); Nova Scotia Health Employees’ Pension Plan (“NSHEPP”); (Federal) Public Service Pension Plan (“Fed PSPP”); Halifax Regional Municipality Pension Plan (“HRM PP”); (Alberta) Local Authorities Pension Plan (“AB LAPP”); Saskatchewan Healthcare Employees’ Pension Plan (“SHEPP”); Manitoba Civil Service Superannuation Plan (“MB CSSB PP”); Ontario Teachers’ Pension Plan (“ON Teachers”); Ontario Municipal Employees’ Retirement System (“OMERS”); College of Applied Arts and Technology Pension Plan (“CAAT”); Healthcare of Ontario Pension Plan (“HOOPP”); Ontario Public Service Pension Plan (“OPB”); Ontario Public Service Employees’ Union Pension Plan (“OP Trust”); New Brunswick Public Service Pension Plan (“NB PSPP”); Prince Edward Island Public Sector Pension Plan (“PEI PSPP”); Newfoundland and Labrador Public Service Pension Plan (“NL PSPP”); British Columbia Public Service Pension Plan (“BC PSPP”); British Columbia Municipal Pension Plan (“BC MPP”); Alberta Public Service Pension Plan (“AB PSPP”); Régime de retraite des employés du gouvernement et des organismes publics du Québec (“QC RREGOP”).
³ The plans were reviewed for the following characteristics: Plan Demographics; Board Structure and Governance; Treatment of Various Member Classes; Practices for Admitting Employers; Optional Forms of Pension; Early Retirement Options; Termination Benefits; Death Benefits; Integration of Canada Pension Plan (“CPP”); Pension Division; Funding; Investments; Pension Benefits Standards Legislation (“PBSA”) Exemptions; and Member Communications and Information.
⁴ Martha Patterson, “Who Works Part Time and Why?”, November 6, 2018. Information accessed April 14,2022; Statistics Canada, “Proportion of worker in full-time and part time jobs by  sex, annual” January 7, 2022.
⁵ For example, OMERS, HOOPP, ON UPP, and NB PSPP.
⁶ For example, BC PSPP, SHEPP, MB CSSB PP, and OP Trust.
⁷ See for example, HOOPP’s definition of “qualifying spouse”.
⁸ For example, ON Teachers’ definition of “eligible spouse”; ON UPP’s definition of “spouse”; and AB PSPP’s definition of “pension partner.”
⁹ For example, NL PSPP’s definition of “principal beneficiary”; NS PSSP’s definition of “spouse”; and MB CSSB PP’s definition of “common law partner”.
¹⁰ BC PSPP contemplates a “new spouse” receiving benefits if the material plan is a single life pension plan with a guarantee; SHEPP provides that a new spouse can be designated as a beneficiary that, under the hierarchical distribution, is only entitled to receive survivor benefits if there is no spouse or the spouse predeceases the member; similarly, ON Teachers provides that a new spouse can receive benefits if the former spouse pre-deceases the member; however, the new spouse cannot receive benefits if there is a dependent child; and, OP Trust stipulates that the post-retirement spouse can only receive benefits if there is no eligible spouse or child.
¹¹ For example, BC PSPP, AB PSPP, SHEPP, ON UPP, and NB PSPP.
¹² PBSA legislation consistently mandates a minimum joint-and-survivor benefit of not less than 60% of the member’s pension benefit.