Considerations for DC plan sponsors before suspending employer contributions

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Blue medical mask for protection against virus and other diseases. On the mask, the red color indicates the graph of the fall. Financial collapse. Market decline. Concept. The fall of securities. © Dina Damotseva /123RF Stock Photos The Canada Revenue Agency is waiving the minimum one per cent employer contribution requirement for defined contribution pension plans for the rest of 2020.

To take advantage of the contribution relief, employers must amend their DC plans to suspend accruals for the year, meaning no employer or employee contributions can be made. Further, DC plan sponsors must submit the amendment to the registered plans directorate.

Waiving the minimum contribution rule is a welcome relief for DC pension plan sponsors, says Jon Marin, a partner in the pensions and benefits practice at Osler, Hoskin and Harcourt LLP. “Given the severity of COVID-19 and the strain it has put on employers, including liquidity concerns, I think it’s certainly been an advocated for, and welcomed, relief.”

Jillian Kennedy, a partner in the wealth business at Mercer, agrees the change is a welcome move because more employers are looking to free up cash flow so they can keep people employed. “Every little cent counts in that direction. Maybe not having to make contributions to a pension arrangement for a small period of time means that more people can stay employed with that company. I think that’s really important to look at right now.”

Before moving forward with suspending contributions under DC plans, Marin advises plan sponsors to check in with their respective regulators. “A number of pension regulators in Canada, including recently the Financial Services Regulatory Authority of Ontario, have taken the position they’d accept the plan amendment that temporarily suspends employer contributions. But where a plan is registered in a jurisdiction where the regulator hasn’t made any public statement on the ability to do so to date, we’d certainly recommend discussing the matter with the regulator before moving forward.”

Plan sponsors in unionized environments must also consider requirements under their collective agreements before implementing the change, he adds.

During the 2008 global financial crisis, DC plan sponsors lowered their contributions, but the ability to totally halt contributions is new, says Kennedy, noting pension sustainability became a big area of focus for the government when the economy began recovering after the GFC. “I think we have to remember this is temporary and that whatever we need to do right now is really important — we can’t discount that because there’s a lot of Canadians out there that are really suffering and a lot of organizations out there that are suffering. But we will get to [the] other side of this.”

A plan for ensuring people can still retire and achieve their financial goals will be required at the end of the current crisis. “We’ve got to restart all of that and make sure that that doesn’t get lost,” says Kennedy.

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