ONE | PUBLIC PENSION REFORM
The newly elected federal Liberal government is committed to exploring enhancements to the Canada Pension Plan (CPP). At the same time, the Government of Ontario is progressing with the implementation of the Ontario Retirement Pension Plan (ORPP). In this political climate, debates surrounding pension coverage and retirement income security will increasingly focus on mandatory schemes. Government will place less emphasis on the voluntary schemes favoured by the former Conservative government, such as the Pooled Retirement Pension Plan and the proposed exploration of voluntary expansion of the CPP. Then there is also the prospect of increased payroll taxes. The debates will have significant implications for retirement plan sponsors who may be exempt from contributing to the ORPP if they have a comparable workplace plan. These sponsors may also see significant changes to their defined benefit pension programs to the extent that plan benefits are integrated with the CPP.
TWO | ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) FACTORS
Effective January 1, 2016, Ontario registered pension plans will be required to file their Statements of Investment Policies & Procedures, including information regarding if and how the plan considers environmental, social and governance factors when making investment decisions. While not (yet) proposed as a mandatory consideration for plan administrators when selecting investments, increasing interest among regulators, investment professionals, labour unions and the general public will likely lead plan administrators to develop more considered positions regarding the role of ESG factors, even in jurisdictions where such information is not required. We will monitor other jurisdictions (such as Alberta, British Columbia and the federal jurisdiction) to see whether they adopt similar disclosure requirements.
THREE | SOLVENCY FUNDING REFORM
Recent legislative developments in Quebec aim to replace the solvency-funding model with an enhancedgoing-concern funding model (including a provision for adverse deviation). Quebec’s model is potentially the most significant change to the funding rules since the solvency-funding model was pioneered in the 1980s. Pension fund sponsors will watch to see whether these developments inspire similar reforms in other jurisdictions, particularly as contribution volatility and the low interest rate environment continue to pressure defined benefit plan sponsors. While solvency reserve accounts have been introduced in Alberta and British Columbia and touted as a solution to concerns over trapped capital, the Quebec model suggests an alternate post-solvency approach that may avoid the need for repeated calls for temporary funding relief.
FOUR | DECUMULATION
Many defined contribution plan administrators, in conjunction with their service providers, will focus on developing and extending to members tools to assist in preparing to convert defined contribution account balances into retirement income, particularly in light of the Canadian Association of Pension Supervisory Authorities’ best practices guidelines.
FIVE | STOCK OPTIONS
While for a variety of reasons stock options do not play as prominent a role in equity incentive compensation programs as in the past, mooted changes to the tax treatment of employee stock options, nevertheless, may significantly impact public and private companies that include stock options in their incentive compensation programs. As part of its election platform, the new Liberal government proposed that the 50 per cent deduction available on exercise of qualifying stock options be applied only on the first C$100,000 of stock-option benefits annually. Much uncertainty remains despite recent comments from the Minister of Finance that suggest that any tax reforms regarding employee stock options will only apply on a prospective basis to options granted on and after the implementation date. Options granted before that date will remain subject to current rules.
Options holders are unlikely to be incented to exercise early in order to avoid application of the new rules, given this expected grandfathering. However, issuers may elect to accelerate the grant of options under existing programs to increase the likelihood that such grants will be grandfathered under the new rules. They also are likely to reconsider their mix of equity incentive options going forward to reduce their reliance on stock options. Should the new rules be extended to the available deductions for options to purchase shares in Canadian-controlled private corporations (CCPCs), there may also be a significant impact on CCPCs that have elected to take advantage of the favourable treatment afforded them under the option rules to issue shares to employees for nil consideration on a tax-deferred basis.