British Columbia’s defined benefit pension plans continue to face funding challenges as solvency deficits mount, according to a report released last week by the Financial Institutions Commission of British Columbia.
In its report, the regulator reviewed 196 defined benefit plans in the province and found that, as of Dec. 31, 2015, the estimated combined solvency deficit was more than $4 billion, an increase of $637 million since Dec. 31, 2014. The report also found the median solvency ratio at Dec. 31, 2015, was 90 per cent, which was down from 93 per cent on Dec. 31, 2014. In addition, just 41 plans were fully funded in 2015, compared to 56 in 2014.
“I don’t see [interest] rates increasing really significantly in the future, so I think these kinds of funding challenges are going to carry on for a long time,” says Greg Hurst, a Vancouver-based pension consultant.
The report found the total assets held in all B.C.-registered defined benefit pension plans on Dec. 31, 2014, were $121 billion. Nearly half (48 per cent) of the assets were in publicly traded equities, while 28 per cent were in fixed-income securities and 13 per cent were in real estate investments. A further six per cent of assets were in other vehicles, with infrastructure investments accounting for the remainder at five per cent.
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Another challenge for the province’s defined benefit pension plans is the increasing number of retirees in comparison to active plan members, according to the report. It found the proportion of active members had declined to 49 per cent from 65 per cent over the last 15 years.
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Having more retiree members “makes volatility of the plan much higher because you don’t have the level of contributions to pay out the benefits,” says Robert Brown, professor emeritus of statistical and actuarial science at the University of Waterloo. “You have to draw on investment income and right now investment income is . . . low and . . . volatile. So the maturation of plans is a very important subplot.”
In light of the challenges, Hurst says some jurisdictions are starting to focus more on going-concern valuations rather than solvency. “They’re saying, ‘If we work on a risk-based supervisory framework, solvency is useful but it’s a big stick and it’s only short term and we do have to focus on long term because most of these enterprises are going to be around for longer term.”
A proposal that includes eliminating solvency funding for certain defined benefit pension plans is on the table in Saskatchewan, while Ontario has proposed enhancing the existing going-concern funding rules while doing away with the solvency requirement. On Jan. 1, Quebec became the first province to move to going-concern funding by removing the requirement to fund private defined benefit pension plans on a solvency basis.
Read: Saskatchewan proposes elimination of solvency funding for certain pension plans
Read: Eliminating solvency funding on the table as Ontario reviews DB rules
Read: Quebec shakes up pension landscape with shift to going-concern funding
While defined contribution plans continue to be an alternative to defined benefit plans (there are 538 registered defined contribution plans in British Columbia, according to the report), target-benefit plans may be the best compromise for plan sponsors and members, says Brown. Under that type of plan, both parties share the risk, he says, adding that British Columbia is leading the way since it made changes to the Pension Benefits Standards Act last September.
In the report, the B.C. regulator also noted its shift from a compliance-based to risk-based supervisory process. While it acknowledged there are challenges in assessing target-benefit plans under the latter framework, it said it’s looking at developing tools to address unique factors such as benefit variability.