Risk management is central to pension plan administration. The latest version of the guidelines, Guideline no. 10, takes a fresh look at the issue. Existing risks include legislative risks and plan sponsor risks, which emphasize the possibility of political decisions affecting the plan or that the “plan sponsor is not able to meet its contribution obligations to the plan, or to continue to sponsor the plan over the long-term, leading to a plan wind-up.”  This article addresses these risks, which are distinct for public and parapublic sector pension plans (PPSPPs) compared to private sector plans. Governments are sometimes tempted to reduce their responsibility for funding a PPSPP, whether the change concerns risk sharing or other plan provisions. The government/sponsor, although able to meet its obligations by its very nature where bankruptcy is extremely unlikely, may prefer not to raise the taxes and duties necessary to obtain the funds required to cover a plan's deficit. PPSPPs may address these risks differently than private sector plans. At the heart of this issue is a stake for the interests of participants, who see their financial prospects worsen when such maneuvers are undertaken by governments.

An example from 2014 illustrates this risk. That year, the Quebec government adopted Bill 15, which aimed to eliminate the deficit in municipal pension plans. The accumulated deficit was divided equally (50-50) between the employer and active and retired members. Automatic cost of living adjustment was also eliminated for these two last groups. This was a request made by the City of Montreal and the City of Quebec to cancel their deficits and reduce their pension plan liabilities. The legislature at the time polarized the debate by arguing that private-sector employees had much poorer coverage than public-sector employees, who benefited from better-quality pension plans. These two examples illustrate the risk to which RRSPPs are exposed. Only the associations representing employees and the associations representing retirees opposed the change. In the past, some individuals participating in the United States’ PPSPPs were less fortunate when plans were converted to defined contribution plans²

Once the risks related to legislation and the plan sponsor have been identified, their assessment would conclude that although the probability of these situations occurring is low, the impacts and consequences for the plan, participants, and retirees can be very significant. The third step in the risk management process is to manage them. The risk management Guideline no. 10 makes no mention of managing the specific risks related to legislation and the plan sponsor that PPSPPs may face. However, various actions that PPSPPs can implement to manage these risks must be considered and weighed, particularly with the aim of generating sympathy and support among the public or stakeholders. They also gain valuable insights that inform their long-term strategy. Here are some of them:

• Rally associations that represent the voice of PPSPPs, such as the Canadian Public Pension Leadership Council;
• Prepare or commission reports on the benefits of PPSPPs for society, the economy, health, or any other topic;
• Enable workplaces outside the public sector to join the PPSPP;
• Participate in the funding or work of research groups working to generate knowledge and advocate for improvements to the pension system, particularly public plans, and to better understand the risks associated with demographic, financial, and social issues affecting pensions;
• Hold assets in Canadian companies, particularly in certain sectors such as affordable housing (see below).

Participants, if they are union members, can obviously be creative and define a role for themselves and participate, where appropriate, in finding solutions to deficits and negotiating plan restructurings to move away from resorting to special legislation. Another strategy, involving a review of investment policy and larger sums from pension plans, is to invest in affordable housing to increase their notoriety and the benefits they bring to society. The example of the 49 pension plans and institutional investors representing 200,000 people investing in Concert Properties is certainly interesting. Concert Properties’ initial mandate was to develop assured rental housing. Through a partnership with Canada Mortgage and Housing Corporation and the City of Vancouver, the company developed 970 rental homes in seven vacancy-controlled buildings on City of Vancouver land with 80-year long leases at advantageous terms. These homes still remain in their portfolio, and the company has since grown and now offers a diverse range of real estate assets, such as residential rental homes, condominiums and industrial and commercial properties, which allow it to generate more stable income for its owners. 

Affordable housing is an attractive product for pension plans that need to invest for the long term and are looking to diversify their portfolios. That said, government involvement is essential to ensure returns for pension plans that invest in this type of asset. This can take the form of loan guarantees, land acquisition discounts, or specific tax credits, for example.

If we accept that sound management of the specific risks faced by PPSPPs involves investing in affordable housing and that the conditions are not met in most provinces to move forward without going against the fiduciary responsibilities of pension plans, it remains that PPSPPs can incur expenses in order to create these conditions, notably by working with the various levels of government. Whether it is to remunerate internal or external resources, PPSPPs can work on this issue, in the same way that expenses are incurred for the strategies set out above. Municipalities could be the first interested parties since affordable housing would alleviate the costs related to homelessness and the lack of affordable housing.

Quebec's two labour-sponsored funds have had a different outcome than the example of Bill 15 and the Quebec municipal plans mentioned above. These labour-sponsored funds offer individual savers the opportunity to contribute to an RRSP. In exchange for a tax credit for savers disbursed by the governments of Quebec and Canada, these labour-sponsored funds must invest 60% of their assets in Quebec, primarily in venture capital where companies do not have to provide guarantees. They define themselves as agents of social change by aiming to generate positive impacts on society and the environment. Indeed, one of them places great importance on the economic training of employees and the other pursues objectives related to sustainable development. Although they are not PPSPPs, the tax credit is financed in part by public money, which means their situation has certain similarities with PPSPPs. In the 2013 federal budget, Stephen Harper's government planned to gradually reduce its share of the tax credit until it was completely eliminated in 2017. In addition to unions, employers who benefit from the investments, chambers of commerce, and economic development groups also opposed the abolition of this tax credit because access to capital without guarantees is rare. Succeeding the Conservative government, the Trudeau government reinstated the tax credit in 2016. More recently, it was the Quebec government's turn to question the tax credit for high-income savers. While the measure was announced for 2024, it was postponed to 2027 on the condition that labor-sponsored funds invest more in … affordable housing, whether for owners or tenants. Working proactively with governments remains the best approach to avoid being subjected to harmful legislative changes. The same observation applies to PPSPPs. Protecting against legislative risk and plan sponsor risk requires finding innovative solutions that benefit both PPSPPs and governments.

Domestic investment represents an avenue for PPSPPs as the Canadian government seeks to increase it. The existence of a community of Canadian businesses whose interests are aligned with those of PPSPs can only help them. The unfortunate and deplorable context of the housing crisis offers an opportunity for pension plans and governments to find winning conditions for PPSPP investment in affordable housing. This would allow PPSPPs to invest in an important asset class, real estate, while protecting themselves from the risks associated with legislation and plan sponsor, while strengthening their ESG investments. Interesting developments to watch include the rollout of the Build Canada Homes organization. Benefits will accrue to PPSPPs and their participants in the improved management of risks related to legislation and the plan sponsor.

The opinions expressed are those of the author and are subject to change without notice. The opinions expressed in this text may not necessarily reflect the views of l’Observatoire de la retraite or its members. The author shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. While helpful, the informations of this text are no substitute for professional tax, investment or legal advice. PPSPPs should seek professional advice for their particular situation. This material was prepared solely for informational purposes and does not constitute a recommendation or a professional advice.

Riel Michaud-Beaudry, Program and Research Manager, Observatoire de la retraite

Riel Michaud-Beaudry is the Program and Research Manager at the Observatoire de la retraite, an initiative of the Institut de recherche en économie contemporaine. In addition to publishing work on retirement in Quebec and Canada, he is also the author of the book La retraite en commun. Fondements, enjeux et propositions. He represents the Observatoire de la retraite on the Retraite Québec Expert Panel and contributes to improving the retirement system by participating in various consultations.