Madam Speaker, I appreciate this opportunity to speak today in support of Bill S-3. This legislation offers concrete and well-considered measures to enhance the supervision of federally regulated private pension plans.
As hon. members know, this bill was introduced through the Senate on September 30 last year and was reported back on November 4 with seven amendments. I would like to take this opportunity to thank the Senate committee for its rigorous review of the bill and the thoughtful amendments that were made. I will highlight the thrust of these amendments later.
Updating the Pension Benefits Standards Act 1985, or the PBSA as it is usually called, is long overdue. I would like to explain to my hon. colleagues that the PBSA is the legislation that governs private pension plans in sectors subject to federal jurisdiction. Examples of these sectors include banking, interprovincial transportation and telecommunications.
The PBSA is administered by the Office of the Superintendent of Financial Institutions, or OSFI as it is usually called, on behalf of our federal government. Of Canada's 16,000 pension plans, 1,100 are covered by the PBSA. They represent approximately $45 billion or 10% of the asset value of all private pension plans in Canada.
With the number of Canadian seniors growing rapidly, I want to assure the House that ensuring sound secure pension plan systems has been and continues to be a priority of the government. My hon. colleagues know that over the past two years the government has embarked on a dramatic reform to the public component of the national pension system.
Not only is the old age security program being transformed into a revised seniors benefit, but also more recently there was the federal-provincial agreement to reform the Canada pension plan. These are two of the three pillars of retirement security for Canadians.
Private pension plans represent that vital third pillar. Here too there is a need for action, although much less dramatic since prudent supervision and good governance are the issues that need to be addressed with respect to private pension plans.
As I stated earlier, these changes are long overdue. The PBSA has not been materially revised since it came into force in early 1987. This is in contrast to the federal institutions legislation where the supervisory and prudential systems were significantly strengthened in 1992, 1995 and again in 1997.
There is no question that the PBSA needs to be updated. While most federally regulated pension plans are fully funded, some pension plans have come under financial pressure as a result of both demographic and economic factors. These include the aging workforce and corporate downsizing we have experienced in Canada. These are two factors which make pension funding relatively more expensive for employers.
In this environment there have also been solvency concerns with some plans while others have been wound up without sufficient assets to pay all the promised benefits. In these situations the employer, whether a single employer or an industry group, experienced economic difficulty.
In addition many pension plans made substantial improvements to pension benefits in the 1980s with the expectation that employers would always be able to fund them. This also added to the challenges. In some cases insufficient contributions were made to fund these improvements.
As these problems emerged it became clear that the current prudential and supervisory framework is not equipped to deal with problem plans. The range of powers and regulatory components needed are not there. Bill S-3 meets these challenges. Under this legislation the federal government and the Office of the Superintendent of Financial Institutions will have additional necessary powers to work with plans that are experiencing problems.
I want to go into the basic principles. I want to assure hon. members that these are not patchwork band-aid measures. The measures in Bill S-3 flow from a series of basic principles outlined in the government's July 1996 white paper.
Included are the principles that private pension plans are supervised for the benefit of members, retirees and other beneficiaries; that the pension regulatory and supervisory framework should contain the incentives and safeguards necessary to reduce the possibility that pension promises are not met; and also that early intervention in and resolution of pension plans experiencing some difficulty should occur.
Outside supervision cannot and will not be expected to guarantee that pension promises will always be met nor can it be a substitute for good governance of the plans by the administrators of those plans. Regulation and supervision must be cost effective.
The regulatory framework for private pension plans should not impose undue costs on existing plans or unduly inhibit the creation of new pension plans. Members of private plans should receive adequate information from the administrator concerning the financial condition of their plan. There must be appropriate accountability and transparency in the supervisory process.
I want to discuss the basic principles in more detail. The first principle helps us to focus on what pension plans are. They are really employee benefits.
Employers, and often employees, contribute to these plans but let us keep in mind that employees often have no opportunity to withdraw from their employer plan while they work for the organization. Without the opportunity to cease making contributions, employees must rely on the plan's administrator to make sound financial decisions with their money so that benefits will be available for them in the future. It is precisely because of this situation that the government believes OSFI must have new powers to resolve the troubled plan's problems early on.
Clearly when an employer's economic difficulties affect a pension plan and a plan fails to manage its risks, it is to the advantage of the plan's members, retirees and other beneficiaries to have the situation resolved promptly.
This should not necessarily mean that the plan be terminated. There may well be other approaches and actions that can more fully preserve the employees' contributions and benefits. Yet termination is currently the only supervisory tool available to OSFI. This leads to another closely related point.
It is important that our regulatory approach recognize that the termination of a pension plan with insufficient assets to pay the promised benefits does not in and of itself represent a failure of the supervisory process. Even in vibrant economies, pension plans occasionally terminate with insufficient assets to pay the promised benefits. The health of pension plans is inescapably tied to the health of the pension plan employer and the industry in which it operates.
In a market economy some companies will inevitably encounter problems. This is simply business reality. The corollary then is clear. With insufficient assets to pay all promised benefits, no supervisory system could even begin to forestall any pension plan termination without the authority and resources to oversee all management decisions made by the sponsor.
Even if it could work in theory, such total supervision is neither feasible nor desirable. Without question this is not a viable approach in a dynamic economy like that which Canada enjoys. What is required is a balanced approach that melds appropriate supervision with responsible internal governance.
I would like to highlight one final principle. That is the need for transparency of the supervisory system, a similar one to the financial institutions supervisory system. If the financial condition of a pension plan deteriorates, it is important that pension plan administrators understand the steps authorities could be expected to take. This understanding provides a realistic and credible incentive for plan supervisors to act in a timely fashion. Furthermore the supervisor must have a clearly defined role.
Amendments in this bill to OSFI's mandate include recognition of the importance of OSFI taking prompt action to deal with pension plans in trouble. To complement Bill S-3, a guide to intervention clarifying actions that could be expected in the role of OSFI in various situations has also been introduced. This guide is similar to ones issued for financial institutions.
I would like to move on to another aspect of this legislation. Bill S-3 allows for the future introduction of a simplified pension plan. This measure is intended to help small employers and to foster an environment that provides incentives for the creation of new pension plans.
The low pension plan participation rate of small businesses suggests that the traditional pension plans do not adequately meet the needs and expectations of small employers. The government believes that action is necessary and needed to correct this situation. Bill S-3 opens the door for the creation of a cost effective regime for pension plans below a certain size, for example, one with 250 members.
In a simplified pension plan, financial institutions could propose standard pension contracts containing both general and specific provisions for the small employer. In addition, financial institutions would be responsible for administering the pension plan.
Standardizing pension plan contracts and transferring responsibilities for plan administration to financial institutions will greatly reduce costs for the small employer. The details of this regime will be introduced later through regulations.