Eliminating the solvency-funding requirement is among the possibilities as the Ontario government launches consultations on revamping the funding rules for the province’s defined benefit pension plans.
In a consultation paper released yesterday, the Ministry of Finance laid out the many options on the table as the government considers what to do about the concerns raised about the viability of its solvency-funding rules. “Despite the various modifications made to Ontario’s solvency funding rules over the years, many plan sponsors have found solvency funding requirements particularly onerous since the 2008 economic downturn, compared to previous periods when equity returns were stronger and long term interest rates were higher,” the consultation paper states.
One of the options under consideration is enhancing the existing going-concern funding requirements while eliminating solvency funding. The government is also considering maintaining the solvency-funding framework while modifying the requirements.
The potential changes to the going-concern requirements include:
- Requiring a funding cushion, known as a provision for adverse deviation. Typically expressed as a percentage of a plan’s liabilities, such a provision can “protect plan beneficiaries against the risks associated with actuarial assumptions, benefit improvements and investment strategies,” the consultation paper noted.
- A shortened amortization paper to fund any unfunded going-concern liability from the current 15 years.
- Restrictions on assumptions about return on investment to set a “maximum best estimate interest rate.”
- A solvency trigger for enhanced funding. Under that option, falling below a certain solvency threshold could trigger additional funding requirements, such as a lump-sum contribution.
- Enhancing Ontario’s pension benefits guarantee fund. “An enhanced going concern funding regime complemented by increased PBGF coverage balances stakeholders’ interests and could reduce overall costs for plan sponsors, potentially encouraging current plan sponsors to maintain their existing workplace pension plans,” the consultation paper stated.
The government is also considering keeping a modified solvency-funding requirement. The potential modifications include:
- Using average solvency ratios rather than requiring plans to fund a deficiency identified in any one year.
- Lengthening the amortization period for plans to fund solvency deficiencies from the current five years under the Pension Benefits Act.
- Consolidation of solvency deficiencies to allow for a fresh start at each valuation date.
- Funding a percentage of a solvency liability, while maintaining benefit security through an improvement to the pension benefits guarantee fund.
- Solvency funding for certain benefits only to, for example, have normal retirement benefits funded on a going-concern basis only. That option again includes the possibility of boosting the pension benefits guarantee fund to improve benefit security.
- Solvency reserve accounts to protect against the risk of an underfunded plan winding up with an insolvent employer. Under that option, plan sponsors may be able to withdraw some surplus under certain conditions.
- A higher limit on the use of letters of credit to cover solvency special payments, up from the current 15 per cent of solvency liabilities.
David Marshall, former president and chief executive officer of the Workplace Safety and Insurance Board, is leading the solvency review. The government is accepting feedback on the issue at pension.feedback@ontario.ca until Sept. 30, 2016.