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Finance Minister Bill Morneau speaks during question period in the House of Commons on Parliament Hill in Ottawa on Nov. 23, 2016.

Sean Kilpatrick/THE CANADIAN PRESS

Federal Finance Minister Bill Morneau is drawing the ire of Canada's labour movement with a government bill that sets new rules for how employers can change their workplace pension plans.

Picking up on an idea that was first proposed two years ago under the Conservatives, Bill C-27 sets new terms for federally regulated employers looking to create target-benefit pension plans, which are sometimes called "shared-risk" plans.

The proposed change would allow federally regulated companies – including Crown corporations, banks and transportation companies – to reduce pension benefits when plans have shortfalls, a move that some warn could erode pension commitments and threaten incomes for vulnerable retirees.

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The legislation was introduced in October without a news release and it has not yet been debated in the House of Commons.

"It's quite reprehensible for the government to table such a far-reaching piece of legislation without any discussion with the labour movement," said Hassan Yussuff, president of the Canadian Labour Congress, who is calling for the bill to be withdrawn.

The legislation would amend the 1985 Pension Benefits Standards Act to set new rules for how employers can set up a target-benefit pension plan, either from scratch or by winding down an existing pension plan. Target-benefit plans are generally viewed as a middle ground between a defined-benefit (DB) plan – which is the traditional form of pension that guarantees a payment for life in retirement from an employer – and the increasingly common defined-contribution (DC) plan. A DC plan obliges an employer to regularly contribute a defined amount to an employee's retirement savings, but the employee assumes all risk for managing the investments.

A target-benefit plan generally sets a goal of providing benefits in a similar way to a defined-benefit plan, but if the target isn't met due to circumstances such as poor investment returns, that financial hit is shared by the employer and the employee.

Opposition to target-benefit plans has divided many in the union and pension sectors.

Many worry that target-benefit plans will hasten the demise of traditional DB pension plans by giving employers a way to erode their guaranteed retirement benefit during periods of underfunding, while others support target-benefit plans as a better alternative to the more dramatic option of converting pensions into defined contribution plans. What is unknown, however, is whether the legislation will be able to do much to slow the flood of conversions into DC plans.

The legislation would apply to the roughly 12,000 federally regulated enterprises. About 820,000 employees fall under this category. It does not apply to the core public service.

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When the changes were first proposed in a 2014 consultation paper by the Conservatives, the plan won praise from a number of organizations, including the Canadian Bar Association, the Canadian Federation of Independent Business, Canada Post and the Canadian Institute of Actuaries. Numerous labour organizations expressed their strong opposition at the time.

Before entering politics, Mr. Morneau argued in favour of shared-risk plans for the public service during a 2013 speech as executive chairman of Morneau Shepell, the largest administrator of DB plans in Canada.

"This is a public-sector problem. Who believes that the average Canadian, without a defined-benefit plan … will, over the long term, agree to continue to fund public-sector employees' pensions at a level that they can only dream about attaining themselves?" he said then.

A spokesperson for the Finance Minister defended the bill on Monday and stressed that any changes to a pension plan would require the consent of plan members.

Ontario pension consultant Alex Mazer, who works with companies and governments on designing pension reforms, said he understands the policy intention to find a middle ground, but he anticipates far more companies would use the new legislation to convert DB plans to target benefit than would go the other way, moving from DC to target benefit. That means the broader public-policy implication would be to reduce retirement security in Canada, he said.

He is also skeptical whether the legislation will do much to halt the march toward DC plans because target-benefit plans will require more complex administration, including creation of a committee of trustees with employee representation.

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"If it is something a labour movement buys into and if there are examples of target benefits that get established as an alternative to going fully to DC, then that could set a precedent," he said. "But it probably would take a fairly strong precedent with a larger employer or group of employers, because it's a fairly complex activity to run one of those plans well. So you probably need a fair amount of scale to do a good job."

Toronto lawyer Mitch Frazer of Torys LLP, who advises companies on pension conversions, believes most employers will continue to prefer converting DB plans to DC plans for the funding certainty. He said target-benefit plans will most likely emerge from union labour talks when there is a standoff over a company's desire to move workers to DC plans, with the target-benefit plan becoming a compromise to secure a deal.

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