Federal pension reforms analyzed

“Our government has listened carefully to Canadians,” said Flaherty in a statement. “We understand the value of secure and sustainable pension plans. We are proposing a balanced package of measures for the benefit of pension plan sponsors, plan members and retirees.”

Expectations
Whether Flaherty’s measures are aligned with those called for by plan sponsors is up for debate.

For example, the new requirement that solvency funding ratios be calculated using a three-year average will likely catch plan sponsors by surprise, explains Ian Markham, director of pension innovation with Watson Wyatt Canada in Toronto. He says most plan sponsors have been hoping for 10-year amortization of solvency deficits, still allowing for asset smoothing without any conditions attached. This would not only reduce volatility, but would grant plan sponsors access to the extra funds should the markets recover.

“This new approach cuts back the volatility, but until we do the modeling we won’t know how it compares to the 10-year amortization with asset smoothing,” he says. “At this stage people don’t fully understand this new method, and they certainly don’t know how some of the transitional rules will work out.”

Markham also feels that plan sponsors were looking for a discount rate based on corporate bond yields, the continuation of asset smoothing, and to have the cap on the ratio of smoothed market value of assets increased.

“Instead we have this formula that I believe nobody has thought of or wanted.”

Brand new second hand
According to Gary Nachshen, a partner with law firm Stikeman Elliot in Toronto, much of what is contained in the proposed reforms is simply bringing federal pension legislation up to speed with other jurisdictions. There is little that is new or innovative.

“There’s relatively little in the way of fundamentally re-thinking solvency funding of pension plans,” he says.

Nachshen explains that the tax threshold increase for a plan surplus will be welcomed by plan sponsors. However, this measure has been called for repeatedly over the years and will not provide material benefits for some time to come.

Nascshen does note the feds have taken more of a leadership role in pension issues as of late, and that he wouldn’t be surprised if the proposed mandatory filing of actuarial valuations found their way into provincial requirements as well.

Wild card
A dark horse amongst the proposed reforms is the “resolution of plan-specific problems” objective.

“This idea is a wild card and could have a large impact on some pension plans,” says Nachshen. “The proposal is clearly modeled on the Air Canada pension regime that was put into place over the past summer.”

Nachshen was involved in the Air Canada process, which saw a specific solution on the airline’s numerous pensions plans hammered out with the permission of the federal government, and says the case paved the way for future settlements.

Markham says that for plan sponsors, the proposals raise as many questions as they answer, but that the section on immediate vesting of benefits should go over well, as should the section on letters of credit, assuming there is credit to be had.

What plan sponsors won’t find in the proposal are the words solvency relief, which may be required in the near future, says Markham.

“We’ve had two rounds of it, and the proposed legislation won’t be in place until 2010, at the earliest. What happens if the markets were to go down again between now and the end of the year? Will there be yet another round of temporary relief?”

Employers that are pondering a move from defined benefit (DB) plans to defined contribution (DC) plans and have been waiting for guidance from the government are unlikely to be satisfied by the proposals,” says Markham. “They will probably hold off until they see more detail on the transition measures before pulling the plug on DB.”

Nachshen says that while some may be disappointed by the government’s efforts, the problems lies mainly with the adversarial structure of today’s pension regime.

“It’s very difficult to address the concerns of plan members and plan sponsors because they’re so diametrically opposed,” he says. “There’s no obvious way to do things differently.”

“A lot of people have understood a defined benefit as being a promised benefit. I think people are beginning to realize that as years go by and pension plans—and their liabilities—grow larger, the underlying assumptions change. The defined benefit is not necessarily a synonym for a promised benefit. People are starting to realize that there is a distinction between the two.”

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