Canadian pension reform: the survey says…

Not long after the downturn, many Canadian jurisdictions implemented temporary solvency funding relief to allow plan sponsors additional time to address their incremental pension deficits. In December 2009, Ontario went a step further and proposed Bill 236, which introduces reforms to Ontario’s Pension Benefits Act. Bill 236 reflects a number of the recommendations from the report of the Ontario Expert Commission on Pensions as well as feedback provided to the Ministry of Finance during 2009. Most of the other recommendations will be dealt with in a subsequent Bill and regulations (expected to be published in the early summer).

The key components of Bill 236, as it affects the benefits provided by plans or the funding of obligations, include the following:

• following a transition period, vesting would become immediate, with an increase in the size of lump sum settlements which the plan sponsor could force a beneficiary to transfer from the plan;
• effective July 1, 2012, all members who terminate involuntarily with age and service totaling 55 years or more would become eligible for the “grow-in” subsidies in the plan&#8212this change would be coupled with the elimination of partial wind-ups from the Ontario pension landscape;
• requirements for transferring assets between pension plans will be clarified and simplified, noting that in no case can the commuted value of the transferred benefit be reduced;
• except for partial windups already in progress or which are declared before their elimination, surplus distribution issues would only have to be addressed following a full plan windup;
• the Superintendent of Financial Services would be empowered to make special orders compelling plan administrators to prepare and file a new actuarial valuation report, if the Superintendent assesses that there is a substantial risk to the security of members’ benefits or where there has been a significant change in the circumstances of the plan.

Over the same period that the Ontario government was developing Bill 236, many plan sponsors were assessing the financial effects their plans bring to the organization, and were developing alternatives for managing or mitigating these risks in the future, generally through changes to investment and plan design strategies.

To gauge the direction of plan sponsors, Towers Watson surveyed more than 110 senior executives in March 2010 to collect their views on a range of topics pertaining to their DB pension plans. This annual survey included questions on the challenges faced by these employers during the financial crisis, their anticipated actions and, for the first time, assessed their level of support for the various changes to legislation being examined by Ontario and other Canadian jurisdictions.

Crisis?
Respondents were asked whether they believe there is a pension funding crisis, and if so, whether the crisis will be long-lasting or cyclical in nature. More than half (52%) of respondents indicated their belief that we are in the midst of a long-lasting crisis, with another 32% concurring that there is a funding crisis, but that it is cyclical. This is the second year in a row that the vast majority indicated that a crisis is upon us (2009 responses were 53% and 35% respectively), despite the general improvement in solvency funded ratios over 2009.

Survey participants were asked to identify the top-three challenges facing their DB plans, with the following factors selected by at least 20% of respondents:
• the volatility of cash contributions and accounting expense (a top-three challenge identified by 91% of respondents);
• the cost of maintaining/funding the DB plan (88%);
• the asymmetry between funding risk and reward (48%);
• compliance and fiduciary responsibilities (28%); and
• changes to move to international accounting (22%).