Canada’s defined benefit (DB) pension plans are near the tipping point, and the federal government must take action soon to avoid a crisis in the near future, according to the Canadian Institute of Actuaries (CIA).
The Department of Finance began public consultations today on the legislative and regulatory framework for federally regulated private pension plans.
CIA president Mike Hale noted in his presentation today in Ottawa that his group released a report in 2007 pointing to concerns about the move away from DB plans (most notably in the private sector), as well as the low level of solvency in DB plans as a result of increasing risk, disincentives for plan sponsors to fund more prudently, and barriers to accumulation of larger surpluses.
“The Canadian government must do its part to fix the ticking time bomb in this ailing segment of the pension system,” Hale said, noting that recent events in credit and equity markets have greatly shortened the time available to defuse the situation.
For example, the solvency funding ratios of DB plans have increased, on average, 27%, putting them in the 70% range or lower, Hale said.
“The risk to individuals has come home to roost in the form of decreased asset values in their DC plans and RRSPs,” Hale warned, while the spectre of reducing benefits to current pensioners is on the horizon.
“Already we are seeing reports suggesting that taxpayers will revolt against paying for rich DB plans in the public sector when they themselves are faced with the prospect of inadequate retirement incomes.”
Still, Hale says the outlook isn’t entirely gloomy, pointing out that DB pension plans can still be among the most secure and stable retirement savings vehicles available to Canadians.
“The government has acted promptly, in the current situation, by announcing its intent to allow temporary funding relief measures,” Hale said, referring to Ottawa’s move to allow pension plans to fund solvency deficiencies over a 10-year amortization period, instead of five years.
However, more needs to be done, Hale stressed, urging Ottawa to adopt three key CIA proposals: the introduction of a target solvency margin to provide greater benefit security; pension security trusts to encourage better funding of pension plans by providing greater clarity to plan sponsors that funds not required to provide benefits will revert to the sponsor; and changes to the Income Tax Act to permit higher and more appropriate levels of surplus.
“Target benefit plans, properly managed, can help fill the gap between DB and DC plans,” Hale said, noting that the CIA is creating a task force to recommend the appropriate governance, actuarial oversight and disclosure to participants needed to support sound benefit maintenance and funding practices for these plans.
“New approaches offering standardized plans for small businesses and/or pooling of administration and investment management should be explored,” Hale suggested. “The regulatory system should not inhibit developments along these lines or other reasonable risk-sharing arrangements between plan sponsors and plan participants. I’m confident that we can put in place appropriate actuarial methods for measurement, reporting and managing of the risks inherent in any plan design.”
The CIA says all provincial and territorial ministers who have a role in the regulation of pensions across the country should meet to discuss this pressing situation.
“In our view, a National Pension Reform Summit remains a necessary component in making sure all the right people are engaged, and the right decisions are made, in a timely way,” Hale concluded. “With the system near the tipping point, the time for action is now.”
Doug Watt is an Ottawa-based writer and editor and co-founder of SRI Monitor, a blog for socially responsible investors.
To comment on this story, contact us.