Unfortunately, these proposed regulatory changes do not significantly remove or address the underlying asymmetry issues when it comes to deficit funding and surplus ownership. The longstanding belief of some that “deficits are the sponsor’s problem” and “surpluses are deferred wages which belong to employees” will continue to plague single employer pension plans. The only change, which potentially helps plan sponsors manage this risk, is the ability to pledge letters of credit to the plan. Notwithstanding these changes, one can expect most plan sponsors to continue their current practice of funding only the minimum amounts required by law.
Pension Benefits Guarantee Fund (PBGF)
The government announced the first major changes to the PBGF since the early 1990s, as follows:
• PBGF stabilization — the government has pledged $500 million to help address the funding costs of recent plan wind-ups due to company insolvencies.
• Increase PBGF revenue — the annual fees paid by some plan sponsors will increase dramatically. The base fee will increase from $1 per member to $5 per member and the maximum PBGF fee will increase from $100 per member to $300 per member. The current $4 million cap on assessments in place for large plans will be eliminated. Given the underfunded status of many Ontario pension plans currently, the increased maximums could triple the annual PBGF fees.
• Reduction of PBGF coverage — the PBGF will no longer cover new plans established, nor benefit improvements granted, in the five years prior to plan termination. The current exemption period is three years.
For plan sponsors, this is an expensive change with no benefit to themselves or plan members. The government estimates that the fee changes would have generated $30 million of increased revenue in 2009, but with many plans still to file actuarial valuation reports since the market decline of 2008, the increase in PBGF revenue could be even larger.
Multi-Employer, Jointly-Sponsored and Public Sector Pension Plans
The government is also proposing changes to multi-employer and jointly-sponsored pension plans (MEPPs and JSPPs, respectively), to provide these plans with alternatives to improve funding flexibility, given the risk-sharing and joint governance structures in place. With the changes, MEPPs and JSPPs meeting prescribed criteria will be exempt from solvency funding requirements.
Increased disclosure to members will also be required for plans that make use of the new funding rules.
Certain pension plans in the broader public sector are being granted solvency funding relief in order to ensure that the key services provided by the affected employers aren’t negatively impacted by increasing pension costs.
The government has proposed a two-stage approach. First, there would be an initial three-year period during which solvency funding relief would apply, allowing these plans to fund a lower funding target and to provide time for the employers to make sufficient progress on the task of making their plans more sustainable over the long term.
For plans that can demonstrate sufficient progress towards a sustainable plan, stage two would provide a further period of solvency relief to implement the necessary negotiated changes and fund current deficits.
Philip Morse is a senior actuary in Towers Watson’s Toronto office.
