Top Five Trends In Pensions And Benefits Law

This past year saw the introduction of some exciting developments in pensions and benefits law. If the past is any indication of the future, this next year will be just as active. The topics outlined below are 2014's most noteworthy legal trends in pensions and benefits law.

Show Me the Money - The Return of the Surplus

The combination of strong stock market returns and rising long-term interest rates led to 2013 being a bounce-back year in the funded status of Canadian defined benefit (DB) pension plans. Previously, many Canadian DB plan sponsors found themselves dealing with significant funding deficits due to a combination of: (i) depressed markets; (ii) historically low interest rates; (iii) increases in life expectancy; and (iv) greater-than-expected payouts of retirement pensions. As of January 2012, nearly 50% of the DB plans in Ontario were less than 80% funded,1 and approximately 15% were less than 70% funded. Recently, those numbers have decreased to 6% and 2%, respectively.2 These recent developments mean that some plan sponsors will have to start thinking about how to deal with surplus for the first time in years. Newfound surplus may also result in the slowing of the current exodus from single-employer DB plans.

Playing it Safe - De-risking Tactics on the Rise

In 2014, pension plan sponsors and administrators will continue to implement various risk reduction strategies to avoid volatility in pension plan funding. For the better part of the last decade, employers in Canada's private sector have been moving away from DB plans and into defined contribution (DC) pension plans to minimize funding and investment risks. DC plans are typically seen as a more predictable, affordable and sustainable alternative to DB plans partly because the longevity and mortality risks are with the plan members. Plan sponsors who have opted to maintain their DB plans are increasingly relying on various de-risking tactics, including:

risk-adverse investment strategies (e.g., liability-driven investing); alternative plan design options (e.g., future service DCs, reducing or removing early retirement and other ancillary benefits, and target benefit or shared risk plans); and risk transference options (e.g., lump sum transfers3 , annuity buy-ins4 , and annuity buy-outs5 ). There is a number of legal and regulatory implications that must be taken into consideration when implementing de-risking tactics. The Office of the Superintendent of Financial...