quarterly pensions, benefits and executive compensation presentation: other post-employment benefits...

Quarterly Pensions, Benefits and Executive Compensation group presentationOther Post-Employment Benefits (OPEBs)

December 6, 2016Dentons AcademyVANCOUVER

Beyond the numbers, a fractal is a striking mathematical pattern which repeats in ever smaller scales.

OPEBs – Weathering the Climate Change

Nick Gubbay, FCIA, FFA

December 6, 2016

Today’s objectives

The context for OPEBs

Who wants what

The reaction

Valuation (and other) considerations

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Some jargon!

Other post-employment benefits (OPEBs)

Non-pension post-retirement benefits (PRBs)

Retiree benefits

Post-employment benefits

Today we’re focusing on non-pension benefits that are paid after retirement

Extended health, dental and life insurance benefits

Not lump-sums paid at termination of employment

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Government, public sector agree on changes to retiree health benefits

Will you have enough money to cover health care bills in retirement?

Total health care

spending … $211B in

2013 … $5,988 per

person.

GM Canada wrong to cut

retirees’ benefits, court rules

Health insurance benefits for retirees are worth the costs

Retiree benefits for Ontario civil servants being cut

OPEBs – the context

Health spending as a share of GDP has trended upward over the last 40 years

6%

7%

8%

9%

10%

11%

12%

8.0%

9.5%9.4%

11.6%

© Canadian Institute for Health Information, 2015.

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SourcesNational Health Expenditure Database, CIHI; Statistics Canada; The Conference Board of Canada.


Trends in public and private health spending

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

Public sector Private sector

Billi

ons o

f dol

lars

© Canadian Institute for Health Information, 2015.

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SourceNational Health Expenditure Database, CIHI.



1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Long Term Government of Canada Bond Yields

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Source: Canadian Human Mortality Database


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What everyone wants

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Plan Member Wants

Financial security

Comfort of having health

insurance

Ability to retire when

desired

Plan Sponsor Wants

Financial security

Predictability or control

over expenses

Ability to attract and

retain talent

The challenge with that …

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• Utilization and inflation• Longevity• New technologies • Government programs

EXTERNAL Influences

•Plan provisions•Plan eligibility•Plan duration• Funding

INTERNAL Influences - SPONSOR

• Lifestyle•Utilization•Cost education

INTERNAL Influences -

MEMBER

Traditional Plan for Life/to 65

Reduced Traditional Plan

HSA + Catastrophic

Facilitated Group Product

HSA

Retiree Pay-All Plan

Defined Contribution

Traditional Plans

NewerPlans

Newest Potential

PAYER FACILITATOR

The reaction - single employer plans

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The reaction - individual plans

Traditional plans, covering suite of services

Various reimbursement rates and maximums

Comparison to group plans Low annual maximums Low lifetime maximums High premiums

Some recent market developments

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The reaction - multi-employer plans

Significant demand for retiree benefits

Negotiated-cost environment Trustees have flexibility to change benefits

Clear communication is important

Reserving Test the sustainability

Funding

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Different ways to measure cost Depends on user Depends on purpose

1. Annual cost (cash) i.e. $2,000 per person per year

2. Lifetime cost (PV)

PV$ $2,000 $2,000$

ValuationDate

1 year 2 years n years

…

…

Discounting

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Sustained low interest rates Lower discount rates mean higher liabilities

Increasing longevity Retirees living longer mean higher liabilities

Eligibility Clearly defined?

Funding Are there any dedicated assets?

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Provisions Which services, at what reimbursement

Be aware of “cross-subsidies” Contributions not reflective of true costs

Management of High cost drugs Out of country expenses

Uncertainty about future medical costs Sensitivity to key assumptions is important

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Further questions?

Nick [email protected]

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About Eckler Ltd. Eckler Ltd. is a leading consulting and actuarial firm with offices across Canada and the Caribbean. Owned and operated by active Principals, the company has earned a reputation for service continuity and high professional standards. Our select group of advisors offers excellence in a wide range of areas, including financial services, pensions, benefits, communications, investment management, pension administration, change management and technology. Eckler Ltd. is also a founding member of Abelica Global – an international alliance of independent actuarial and consulting firms operating in over 20 countries. For more information visit: http://www.eckler.ca.© 2016 Eckler Ltd. All rights reserved

mailto:[email protected]

http://www.eckler.ca/

Other Post-EmploymentBenefits (OPEBs)Scott Sweatman, [email protected]+1 604 443 7114

December 6, 2016

• Identifying and Mitigating Legal Risks

• OPEBs: Impact on corporate transactions – mergers and acquisitions

• Funding OPEB promise – Health & Welfare Trusts and Employee Life and Health Trusts

December 6, 2016

Agenda

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• Two general forms of legal risk when changing/reducing OPEBs1. Changes to OPEB entitlement for existing employees2. Changes to OPEB entitlement for retired employees

December 6, 2016

Legal Risks

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• Case law in Canada, including recent cases, stand for the following general rules:• Rights to OPEBs can be granted outside of a written employment contract.

Courts look to booklets, letters, communications to determine whether a promise has been made

• The specific Reservation of Rights (“RoR”) language at issue determines an employer’s ability to make changes

• Depending on the terms of the employment contracts and RoR language, it may be possible to change/reduce OPEBs for existing employees with sufficient notice

• Generally, once OPEB entitlement has crystalized on retirement, OPEBs may not be changed, unless an employer has expressly addressed retiree changes in RoR language

December 6, 2016

Legal Risks (cont’d)

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• Timberwest Forest Corp. v. Gustavson, 2012 BCSC 1232

• Bennett v. British Columbia, 2012 BCCA 115

• Lacy v. Weyerhaeuser Company Limited, 2013 BCCA 252

• O’Neill v. General Motors, 2013 ONSC 4654

• Vivendi Canada Inc. v. Dell’Aniello, 2014 SCC 1

December 6, 2016

Canadian OPEB Case Law

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• Similar to pension, employment and general HR due diligence before the merger or acquisition, reviewing whether and when post-employment benefit promises were made is crucial exercise

• Who made the promise?

• How was the promise communicated?

• Are you satisfied that the OPEB liability has been properly quantified?

• Consider obtaining a second actuarial/accounting expense opinion.

December 6, 2016

OPEBs – Impact on Corporate Transactions

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• Consider extent to which OPEB liability can be settled and/or whether vendor or purchaser is on the hook for liability

• Is this an asset or share transaction?

• Does the transaction crystalize a portion of OPEB liabilities for employees who are or will be excluded from successor employer’s operations?

December 6, 2016


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• If OPEB liability is significant in relation to purchase price, consider negotiating purchase price offset if settlement of liability or funding isn’t possible

• Can purchaser handle administration of OPEBs post-sale?

• What liability might vendor have if purchaser fails to honour OPEB promises?

December 6, 2016


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• Auto sector employers in face of insolvency commenced a class action proceeding against retirees, seeking to reduce OPEBs

• Stakeholders arrived at a Settlement Agreement, which was approved by the Court

• All liabilities for OPEBs ceased as of a certain date

• OPEBs administered through a trust, with individual trustees appointed, and funding secured in part through promissory notes

• Trustees have discretion to reduce benefits if funding levels drop

December 6, 2016

The GM/Chrysler Solution

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• To fund or not to fund OPEBs?

• Determine whether employer (and unions) have an obligation to pre-fund some or all of the accrued and/or desire OPEB liabilities.

• Employers typically must account for unfunded OPEB liabilities in their financial statements.

• Liabilities can be sizable so if decision is made to address accrued liability, what methods are available?

December 6, 2016 31

OPEBs – Funding the Promise

Health & Welfare Trusts:• Restricted to provide health and welfare benefits (within the parameters

of CRA’s interpretation Bulletin IT-85R2) – disability, medical, dental and group life insurance.

• HWT can not be controlled by funding plan sponsors and cannot make direct investments in plan sponsor entity.

• HWT subject to tax like any other inter vivos trust (highest marginal rate) on its investment income.

• Common for HWTs not to pay tax because trusts are able to deduct taxable benefits paid to beneficiaries.

December 6, 2016 32


Heath & Welfare Trusts:• Employer contributions to HWT can be deducted in the year in which

there is a legal obligation to make a payment to the extent that the contribution is reasonable in the circumstances (see Labow v. the Queen, 2011 FCA 305, 2012 DTC 5001)

• CRA has expressed the view that only such portion of employer contributions which are used by the HWT to provide current year benefits would be currently deductible plus reasonable administrative costs of the trust.

• Generally current year contributions are deductible in the year if they were actuarially determined.

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Heath & Welfare Trusts:• CAUTION! – where a decision is made to fund an actuarially determined

liability in respect of benefits that are forecasted to be payable in future years (in contrast to contributions used to fund payment of benefits arising from claims made in the year or prior years) employers’ contributions may not be tax deductible.

December 6, 2016 34


Employee Life and Health Trusts:• Independent, taxable inter vivos trust to which an employer (or group of

participating employers) contributes in order to provide “designated employee benefits” (“DEBs”) to employees and their dependents.

• DEBs defined in ITA 144.1(1) to include benefits from a group sickness or accident insurance plan, group term life insurance policy or private health services plan – same as HWT benefits!

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ELHTs:• Trust must be resident in Canada.

• Level of participation of “key employees” must be limited (e.g. not a tax-deferral vehicle for high income earners or owner-employees).

• No participating employer may have rights under the trust, except right to DEBs if employer is an individual.

• Trust can’t lend to or invest in employer entity.

• Representative of one or more participating employers may not form majority of trustees.

• Trust has legal right to enforce payment of contributions to trust.

December 6, 2016 36


ELHTs:• More tax efficient than HWT because HWT is only able to deduct taxable

benefits it pays out, whereas ELHT can deduct all benefits whether taxable or non-taxable to beneficiaries.

• ELHT can also deduct all costs related to provision of DEBs, including insurance premiums, claims, administrative expenses and commissions paid to brokers and investment managers.

December 6, 2016 37


ELHTs:• Consider advantages of ITA 144.1(6) for additional relief afforded to

employers who contribute to multi-employer plans in accordance with obligations set out in a collective agreement.

• Employers may deduct in computing its income for a taxation year amounts they are required to contribute to an ELHT if at the time of contribution is made no more than 95% of the employees who are ELHT beneficiaries are employed by a single employer and at least 15 employers will contribute to the trust.

• Contributions to trust under negotiated contribution formula of collective agreement is permissible notwithstanding. financial experience of the trust.

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ELHTs:• OPEB liability can be settled either through ongoing employer

(and perhaps employee/retiree contributions) over longer term or, lump sum contributions to fully settle accrued liability in the short term.

• If employer is wishing to settle OPEB liability to improve its financial/balance sheet situation, it should negotiate reduced coverage with actives and perhaps retirees as consideration for securing an otherwise unfunded and unsecured liability.

• Negotiation options include: increased employee/retiree premiums and co-payments, present value (discounted) lump sum payments to retirees or combination so that introduction of ELHT funding is financially realistic for employer’s bottom line.

December 6, 2016 39


Thank you

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December 6 2016

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