On Hold

Some provinces also permit the unlocking of pension benefits. In most cases, however, unlocking is available only on a restricted basis. For example, it is more likely to be an option at termination, rather than retirement, and for members of RRSPs rather than members of registered pension plans. From the plan member’s perspective, unlocking could be a useful transition tool—but only if it provides the desired flexibility.

Need for Change
While phased retirement may be an attractive option for many plan members, it carries a price tag: higher benefits and administrative costs. Those higher costs, in turn, could lead to higher contributions. Yet for most plan sponsors, cost control is a key issue. After all, a plan is viable only if it’s affordable.

So the question becomes, How can we control costs? Here are a few possibilities to consider.

Provide funding relief – Plan sponsors and pension regulators don’t always see eye to eye on the topic of benefits security. Under the current rules, plan sponsors are required to make additional contributions to pay off any solvency shortfall identified in a valuation filed with a pension regulator. Many plan sponsors argue that those contributions could be put to better use—for example, improving benefits or even preserving jobs. But the reality is that a combination of low interest rates and declining asset values has hit many plan sponsors with a double whammy: bigger deficits resulting in an increase in additional contributions.

A number of provinces have introduced, or will shortly introduce, solvency funding relief. Although this is a welcome step, the relief is expected to be temporary. Moreover, some provinces are being accused of introducing relief that isn’t practical because few plan sponsors will actually be able to take advantage of it. If that’s the case, the rules should be relaxed to make relief more accessible. At the same time, plan sponsors should be required to communicate the details of any relief that is accepted and what it means to the plan members.

Eliminate the need for solvency funding – In lieu of solvency funding, plan sponsors could be required to develop and maintain a funding policy that clearly identifies plan objectives, funding targets and tolerance for funding deficits on an ongoing basis, and that limits ongoing assumptions. That policy should also address unexpected events, such as the impact of a 10% decline in stock markets in a given year, and outline an action plan to address such events.

Review tax-related limits – One of the benefits of providing a pension plan is tax effectiveness. However, it’s been years since the various tax-related limits placed on pension plans have been fully examined. For example, a review of the pension adjustment factor is long overdue. The current “factor of nine” for DB plans was set more than 20 years ago, at a time when interest rates were higher and DB plans generally provided richer benefits. Reducing this factor would increase the RRSP room available to DB plan members, allowing them to save more and providing them with greater flexibility when planning for retirement.

Likewise, accelerating increases in the annual 18% contribution limit for DC plan members would allow them to save more, help to offset market losses and lead to less reliance on government retirement programs. It would also help to bring the Canadian limits more in line with those in the U.S. and the U.K.

Increase flexibility – Regulators should also consider new plan designs that offer greater flexibility. DB and DC pension plans have their own strengths and weaknesses, so why not expand the legislative framework to accommodate a hybrid plan that brings together the best of both plan types? Expert panels formed to review pension legislation in Ontario, Nova Scotia and B.C./Alberta have all recommended the introduction of such a plan: the jointly governed target benefit plan (JGTBP).

For plan members, a JGTBP works much like a DB pension plan. Pensions are determined based on a formula, assets are invested on an aggregate basis and mortality risk is pooled. For employers, a JGTBP works much like a DC plan: there is a fixed schedule of employer contributions, effectively eliminating the contribution volatility and risk associated with DB plans.

If the assets of a JGTBP are insufficient to meet the liabilities, the benefits are reduced. As a result, three safeguards are required.

1. Plan governance must be shared between employers and employees.

2. Comprehensive communications must be provided to everyone entitled to a benefit under the plan.

3. A funding policy based on conservative actuarial assumptions must be developed so that deficits are the exception, not the norm.

JGTBPs would give plan sponsors the ability to better manage costs and the flexibility to provide members with the best available plan. That, in turn, would enable members to better manage their retirement expectations—even in challenging markets.

So far, the economic downturn has generated little in the way of positive outcomes. But it has become clear that we need to knock down the legislative barriers that stand in the way of effective pension management and introduce flexibility to ensure that private sector pension plans remain a valuable source of retirement income in the future.

Catherine Robertson is a consulting actuary and principal with Eckler Ltd. in Toronto.
crobertson@eckler.ca

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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the May 2009 edition of BENEFITS CANADA magazine.