In 2011, the Ontario government announced measures offering temporary solvency relief for eligible public sector pension plans that are less than 90% funded. A number of Ontario universities have already signed on for relief, and other plans—both public and private—can learn from their experience in the fight for sustainability.
To obtain solvency relief, plan sponsors must first provide the government with a strategy aimed at improving the plan’s financial sustainability. During this first stage, those granted relief will make minimal, if any, special solvency payments. At the end of three years, plans that have taken sufficient steps toward sustainability will be permitted to move to the second stage; those that fail to show progress must revert to regular funding rules. In Stage 2, the plan sponsor has up to five years to implement plan changes and up to 10 years to liquidate solvency deficits. In exchange for solvency relief, contribution holidays and benefits improvements are restricted.
To date, 15 of the DB plans operated by Ontario universities have been approved for solvency relief. The majority of these are considering an increase in member contributions to move toward sustainability. Other changes under consideration include the following:
- changing early retirement provisions;
- decreasing/removing contractual post-retirement indexation;
- changing the benefit formula; and
- converting to joint sponsorship for future service.
Policy review
Like every DB plan sponsor, the Ontario government—as the indirect sponsor of broader public sector pension plans—is concerned with its exposure to pension risk. Lower-than-expected investment returns and record-low discount rates have driven many DB plans into a deficit position. Moreover, recent economic events in Europe suggest that the situation is likely to persist, at least in the near to mid-term. If so, many pension plans need to take action now.
Mitigating pension risk is best achieved by managing three key intertwined policies: investment, funding and benefits. While many plans have begun to review their investment and funding policies, they have shied away from making changes to the benefits policy. However, investment and funding policy changes can only do so much to achieve sustainability.
A benefits policy review may mean making difficult decisions to achieve sustainability (e.g., reducing ancillary benefits such as early retirement subsidies). Given that ancillary benefits can increase the cost of a simple DB promise by 50% or more, it’s no wonder that most of Ontario’s university-based plans are looking to either decrease these benefits or, at the very least, get members to contribute more to help offset the cost.
Member buy-in
The first—and perhaps the biggest—step in making plan changes is getting members onside. Plans with a track record of communicating with stakeholders on an ongoing basis will have a good head start, since their members will be more likely to understand the value of their benefits, be aware of the plan’s financial status and realize the consequences of inaction.
Most DB plan sponsors contribute significantly more to fund current service costs than do members. And when special payments to eliminate funding deficits are taken into account, plan sponsor contributions are often two to three times member contributions. Unfortunately, important messages such as these are not often made clear in plan communications.
Pension plan sponsors, especially those with DB plans, face many challenges. To protect the sustainability of their plans, sponsors and members need to team up to meet those challenges head on. In some cases, that will mean working together to review benefits policies, make tough decisions and adjust benefits accordingly to ensure that the DB option remains viable.
Jasenka Brcic is a principal with Eckler Ltd. jbrcic@eckler.ca
Get a PDF of this article.