With defined benefit pension solvency reforms gradually coming in across the country, two experts debate whether there’s a better way to ensure DB plan sustainability and security.
Todd Saulnier, vice-president, the Association of Canadian Pension Management’s board of directors
The answer is mostly yes. A floor of 85 per cent of solvency liability might be considered, with the primary focus on improving the sustainability of DB plans.
In the low interest rate environment of the past 20 years, it’s been well documented that DB plans in a 100 per cent solvency funding regime experience a higher degree of contribution volatility requirements, leading to strategies that are short term.
Read: New paper calls for linking DB pension solvency minimums to plan member age
Numerous attempts have been made to address the cost, volatility and asymmetric risk issues for plan sponsors with options that reduce, smooth or eliminate required contributions. The frequent use of temporary solvency relief suggests there’s something fundamentally broken in funding regimes that focus on solvency funding.
Benefit security is better served by retaining the DB plans that remain and offering a regime that provides for an orderly funding of benefit costs, including the use of provisions for adverse deviation and stabilization margins before any contribution holidays are allowed.
The provinces that have adopted, or are considering adopting, an enhanced going-concern regime include: British Columbia, Alberta, Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia. The Canadian Association of Pension Supervisory Authorities has set out guidelines for the development and regulation of these funding regimes. Given the successive regulatory changes, there’s merit in having a similar framework for all Canadian single-employer DB plans.
Read: A look at the landscape for pension solvency funding reform across Canada
The ACPM strongly encourages a focus on an enhanced going-concern funding regime. Under this regime, direct solvency funding can be eliminated — or a lower minimum solvency funding level, i.e., 85 per cent can be adopted — and it shouldn’t increase contribution volatility.
We answered ‘mostly yes’ to the question because it’s reasonable to restrict any contribution holidays until the plan is fully funded on both a going-concern basis (including prescribed PfADs) and a solvency basis and a stabilization margin has also been funded under both measures.
Corey Vermey, director, pensions and benefits department, Unifor
No, governments across Canada should instead be strengthening solvency rules, which provide a high degree of financial security for DB pension plan members and retirees. Unifor has consistently called for any increased risk of plan failures or insolvency with windup deficiencies to be covered by pooled insurance in the first instance (and by increasing the pension benefits guarantee fund maximum limit in Ontario) as the most practical relief from the risk of insolvency where plans are in deficit — to effectively pool the financial risks to insure the promised pension. A PBGF serves to pool and socialize this insolvency risk (the unique risk of plan sponsor insolvency faced by single-employer plans) and offers practical relief and benefit security to plan members, retirees and beneficiaries.
Read: Ontario temporarily slashes penalties for PBGF non-payment
Unifor supports enhanced disclosure obligations — informing plan members, retirees and their unions representatives — and consent mechanisms — where those who are directly impacted determining through informed consent whether to assume any greater risks. We support demonstrated need; the contingent, case-by-case consent approach, not sweeping universal relief or permanent solvency funding elimination, allowing the most derelict negligent employers to further underfund their pension.
Unifor supports, on an ad hoc basis, employer requests like the distressed plan workout provision in the federal jurisdiction in situations where solvency relief could play a role in continued support for protecting jobs and communities. But if solvency funding rules are eliminated and member consent provisions removed, there’s no guarantee of investment in Canadian facilities or maintaining Canadian employment levels.
As well, organizations sponsoring pensions with solvency deficits should be restricted from share buybacks or increasing dividends until their pension is fully funded. This represents a better balance of interests and enhances benefit security of members, retirees and beneficiaries as stakeholders in the corporation.
Read: Could solvency reform in Canada lead to a DB pension revival?