February 13, 2020
The first major reform to the U.S. retirement system in a decade, the Setting Every Community Up for Retirement Enhancement Act, contains provisions that could be useful guides for Canadian legislators and regulators.
Signed into law by President Donald Trump in December, the act, known as SECURE, is primarily aimed at addressing Americans’ difficulty in saving and investing for retirement. If some of the ideas were adopted in Canada, they could have a significant impact on plan sponsors.
Among SECURE’s highlights are provisions encouraging income annuity options in defined contribution plans; encouraging smaller employers to adopt plans and automatic enrolment regimes by way of tax credits; allowing retirement benefits for long-term part-time employees; and changing the distribution rules, largely by making them more flexible.
SECURE addresses one of the major deterrents to employers considering fixed lifetime annuities — namely, plan sponsors’ fear of being on the hook for any liabilities, including potential shortfalls. The U.S. legislation deals with this by creating a fiduciary safe harbour, as well as a portability option for plans to distribute annuity contracts when annuity options are terminated.
In 1988, citing the fear of putting plan sponsors at risk, Canada’s federal government prohibited DC plans from offering fixed annuities. Since then, very few Canadians have had access to that option at retirement, since only plans that pre-existed 1988 were able to offer it.
Currently, retirees interested in annuities must purchase them individually from the insurance industry. But if DC plans could offer them internally, they could achieve the advantages of scale and expertise.
In 2019, however, the federal government proposed tax rule changes that would allow variable payment life annuities. But when the 2019 election was called, the proposals died on the order paper. While the Liberals remained in power, they lost their majority and so the future of the proposals remains uncertain.
In pre-budget submissions, many industry organizations are urging the government to resurrect the 2019 proposals. “As you are aware, implementation of the required Income Tax Act changes was interrupted by the federal election of last October,” wrote the Pension Investment Association of Canada in early February. “As you prepare for the 2020 budget, we strongly encourage you to put these changes back on the table as part of the upcoming budget.”
It’s important to remember that federal tax changes alone won’t invigorate in-plan life annuities. Rather, provincial legislation will be required in most instances. A safe harbour approach, similar to that found in SECURE, could hasten the evolution.
“The SECURE safe harbour greatly reduces the requirement for fiduciaries to investigate insurance products by providing a due diligence checklist and allowing fiduciaries to rely on state insurance regulators’ assessment of the proposed insurer,” says Carol Buckmann, a co-founding partner of Cohen & Buckmann, a pension and benefits law boutique in New York. “Previously, plans had to do an independent financial review of the insurer.”
However, to achieve safe harbour status, plan fiduciaries must conduct a systematic search of insurers and determine that the annuity fees are reasonable.
SECURE also creates new mandatory distribution options for DC plans, including payouts for expenses related to births or adoptions, as well as disaster and hardship related distributions.
Finally, SECURE increases tax credits for small employers that set up plans with further incentives for those that adopt automatic enrolment. It also liberalizes the rules for pooled plans to help small employers share risk and administrative responsibilities.
Still, Bob Baldwin, an Ottawa-based pension consultant, believes increasing participation in retirement savings plans is a difficult proposition, especially in the non-union sector.
“[Organisation for Economic Co-operation and Development] publications have shows that it’s rare to get more than 50 percent of an employed population to take up voluntary retirement savings arrangements, and we’re already close to that in Canada,” he says. “We have a problem with small employers that the financial institutions haven’t solved and governmental programs like pooled registered pension plans and similar initiatives in Quebec have not seen strong take up.”