The Association of Canadian Pension Management is calling on the Office of the Superintendent of Financial Institutions to address funding asymmetry in its approach to regulating defined benefit pension plans using a portfolio replicating approach.

In an open letter to the OSFI, Ric Marrero, the ACPM’s chief executive officer, raised concerns related to planned revisions of the instruction guide for the preparation of actuarial reports for DB plans. According to the letter, the requirement that plan sponsors include margins on portfolio replication methods would lead to plans becoming overfunded.

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“By definition, these margins cause pension plans to be overfunded, illustrating the need to address funding asymmetry,” wrote Marrero. “We continue to encourage that, until the sustainability review is completed and funding asymmetry addressed, the proposed changes to the replicating portfolio method be deferred as they are likely to increase solvency funding.”

The draft also includes new guidelines that would require plan sponsors to assume a 50 per cent correlation between economic risks and non-economic risks. According to the ACPM, the two risk categories are only very weakly correlated.

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“For this reason, we believe that the minimum correlation assumption of 50 per cent required by the draft guide is far too high,” wrote Marrero. “Any such correlation is likely much closer to zero per cent than to 50 per cent and we believe that this assumption should be left to the judgment of the actuary.”

The ACPM also took issue with revisions on guidance related to credit ratings. According to the draft proposals, the OSFI would require pension credit ratings to be based on that of the sponsoring businesses and to reflect a pension’s subordinated debt. Simply using a sponsors’ credit rating would be more effective, stated the letter.

“First, given that pension deficits would only go unpaid in a scenario where the corporation fails more generally (i.e., in an insolvency scenario), it seems more appropriate that the general corporate credit rating of the employer be used.

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“Second, subordinated debt ratings are typically set, at least in part, in reference to the specific terms of the subordinated debt (like timing and quantum outstanding) and may not be the best reflection of the corporations’ ability to pay the pension deficit. Third, on a practical level, many companies do not have rated subordinated debt but otherwise have a general corporate credit rating.”

This is the second time the ACPM has responded to the OSFI’s proposed changes, having written a letter of response to an original draft published in 2019. The changes are expected to come into effect by the end of 2021.

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