CIA offers 10-point plan for pension reform

Speaking to a gathering of actuaries on Tuesday in Toronto, CIA president Robert Howard praised recent efforts by the federal government to reform the pension system, but said it does not go far enough.

“It seems [as if] every day some news breaks in the pension field and, unfortunately, very little of it is good,” he said. “[Federal Finance Minister Flaherty’s proposals] are a step in the right direction, but the pension reform he announced needs to be deeper, much deeper.”

Howard highlighted the challenges currently faced by Canadian plan sponsors, including changes to pension accounting standards that create volatility in balance sheets. New pension plans are becoming increasingly rare, while existing plan sponsors are minimizing their contributions and winding up plans where they can.

“We believe that things have gone too far for governments to tweak around the edges of the problems,” said Howard. “Minor adjustments and temporary fixes simply won’t help. Governments need to transform the ways that they approach retirement savings. They need to implement fundamental changes to a number of acts and regulations to pave the way to deal with a challenging future.”

Howard outlined the CIA’s vision of what is required in order to buttress Canada’s retirement system and stop the decline of the DB pension plan. This vision is centred on five core issues:

• increased retirement savings;
• wider pension coverage;
• more flexibility in retirement;
• more education on retirement issues; and
• the rehabilitation of the DB pension plan.

To address such needs, the CIA’s newly released report, Retooling Canada’s Ailing Pension System Now, For the Future proposes 10 measures.

1. Pensions need to be on the national agenda.
Noting the upcoming meeting between federal and provincial finance ministers in Whitehorse in December, Howard said the call for a national pensions summit may finally have been heeded.

“This looks to be the very meeting that we have been advocating. It can be a meeting where a road map and timetable for reform are agreed to by federal and provincial decision-makers. Make no mistake about it, this meeting is important.”

2. Regulators should develop a principles-based approach to supervision and monitoring of pension plans.
Such a measure, explained Howard, would remove impediments to the maintenance and improvement of DB and other types of pension plans.

3. Disincentives for working past retirement age should be rectified.
Models that allow workers to take on part-time, seasonal or job-sharing arrangements while allowing them to collect partial retirement benefits are needed.

4. Increased retirement education is needed.

5. Employers should be allowed to create a pension security trust.
The creation of such a vehicle—separate from a DB plan—would solve the asymmetry in pension surplus and would encourage employer contributions beyond the minimum legally required, said Howard.

“Employers gain because they can contribute more than the absolute minimum, knowing that if a surplus arises in the future, it can be recovered. Pensions and employees gain because stronger funding will make their benefits more secure. Contributions into the trust would be tax-deductible; withdrawals back to the employer would be taxable.”

6. DB plans should establish a target solvency margin.
The CIA feels that such a margin would recognize the volatility of pension plans and their assets and help establish a risk-based approach to plan funding contributions.

“At present, when times are good, employers stop contributing when a plan becomes 100% funded,” said Howard. “When the inevitable downswing occurs, the plan goes into a deficit and members’ pensions are at risk.”

The CIA proposes a funding target higher than 100% in order to reduce the risk of a funding deficit. Employers would not be able to take a contribution holiday until the target solvency margin is exceeded, and they would be more willing to accept additional funding through the pension security trust since it remains under their control.

7. A task force should be formed to develop guidance on the required levels of target solvency margins.
As the target solvency margin is not a “one size fits all” measure, representatives from the CIA and regulators will need to assess risk factors for different plans.

8. Tax rules should be amended.
The CIA says DB plan sponsors should be allowed to contribute enough to develop surpluses that are greater than two times the target solvency margin, or 25% of the going-concern liabilities.

“In our opinion, without the pension security trust and target solvency margin both in place, the proposed increase in the cap on surplus will accomplish nothing,” said Howard. “Few plan sponsors have funded to the 10% limit in current legislation, and we expect none to use the additional 15% that is proposed. However, if the pension security trust and target solvency margin are implemented, we can see many sponsors using the additional funding room, particularly in good times. The result will be better protection for plan members during rough times.”

9. Legislation is needed to better protect underfunded pension benefits in the event of a bankruptcy.
The CIA suggests that new legislation be tabled that affords underfunded pension benefits similar treatment to that of unpaid workers in bankruptcy and restructuring proceedings.

10. Better legislation is needed to handle the determination of benefits in an unfunded plan is wound up due to bankruptcy.
Such legislation, said Howard, could contemplate a hierarchy in the entitlement of benefits, where plan assets are allocated first to the basic pension promise and then subsequently to other benefits.

“Had these 10 proposals been in place prior to the recent crisis, pension funds would have been in a healthier financial position,” said Howard. “More importantly, plan members would have been in a healthier financial position. Pension funds would have been less threatened by the crisis, and some relief measures would not have been necessary.”

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