September 1 2016
Submission to Ontario Ministry of Finance
This document is in response to the Consultation Paper “Review of Ontario’s Solvency Funding Framework for Defined Benefit Pension Plans” for submissions regarding the discussion around “Ensuring the Ongoing Strength of Canada’s Retirement Income System” and expresses the opinion of the Actuaries at Westcoast Actuaries Inc. In our opinion the authors of this Paper are to be commended for the comprehensive coverage of the issues involved and the impartiality of the arguments presented. Our actuaries have many years of experience in the Canadian and International pension fields and we have observed developments which have led to the deterioration in the Canadian Pension System. A major factor in this deterioration is the shift away from defined benefit (DB) pensions plans to defined contribution (DC), Group RRSP or no company retirement arrangement at all. We feel that the DB pension plan, which has been the cornerstone of Canadian retirement systems for many years, must be re-established to the extent possible such that it will be a major element in future Canadian retirement planning.
In our opinion, the current perceived crisis in retirement income for Canadians has come about because of the continuing disincentives which impact employer sponsored pension plans. In the past employers were prompted to reward long service employees by providing them with financial security in their retirement years with a pension. This was normally provided by a DB pension plan where the member had a pretty good idea what pension they would be receiving to assist in personal retirement planning. As in other countries such as the United States of America and the United Kingdom, this “paternalistic” approach has mostly disappeared. It can be argued that changing attitudes of employers to their employees are to be blamed – benefit programs are expensive and employers are looking for ways to cut costs by cutting back on these programs. If other employers have either terminated their pension plans or converted their DB pension plan into a DC plan of lesser dollar value, it makes the decision to follow suit so much easier. To the extent that the corporate culture has changed, this will be difficult to fix. However, we believe there are disincentives in DB pension plan funding which can be eliminated. if these disincentives are dealt with, then some companies will be tempted to consider starting or maintaining their existing DB pension plans.
Opinion of Westcoast Actuaries Inc.
When solvency rules were first legislated, the impact was relatively light as high interest rates used for solvency valuations almost always produced a lower liability than a going concern valuation for final earnings plans. With the gradual drop in interest rates, solvency valuations started to have a negative impact on the viability of DB pension plans. Now we are faced with the situation where most DB plans are actually funding on a solvency basis. It seems incongruous that legislation requires plans which are healthy on an ongoing funding basis are required to fund as if they are winding up. In our opinion the constraints involved in solvency funding have been a large contributor to DB plans being wound-up.
There are many reasons why the once healthy DB plan regime has declined to such an extent that it may be extinct in a few years. From our experience with DB pension plan sponsors, we agree that the major concerns which have led plan sponsors to move away from their DB plans have been addressed as listed on pages 3 & 4 of the Consultation Paper. We would say that the most significant of these factors are the high cost of solvency funding and the volatility in contribution requirements.
We feel that the basic underlying concept of pension funding on a going concern basis should allow the plan sponsor a high measure of stability in contribution levels from year-to-year at an affordable cost. This should be the basic requirement for an ongoing legislative funding structure.
We feel the approach that will have the most likely influence on plan sponsors maintaining their DB plans or to implement new plans is Approach B – Eliminate Current Solvency Funding Rules and Strengthen Going Concern Funding. We feel that any references to a solvency valuation, no matter how watered down they might be, will still be viewed negatively by DB pension plan sponsors. For this reason we do not endorse Option 4 under Approach B. We also feel that shortening the amortization period for deficits (option 2) is not necessary and that deficits should be amortized over the working lifetime of the plan membership. It might be considered, however, to shorten the expected working lifetime of the group if the health of the plan sponsor or the industry in general is in doubt.
We endorse the approach set out in Option 1 where a reasonable funding cushion is established to serve the purpose of eliminating volatility in contribution rates and ensuring that sufficient funds are available upon wind-up.
Designated Pension Plans
Westcoast Actuaries specializes in actuarial consulting and administration of Individual Pension Plans (IPPs). These plans are required to be registered with FSCO and are required to follow the minimum funding rules. As IPPs are designated plans as defined in the Income Tax Act, the amount which may be contributed to these plans is restricted by maximum funding rules in the Income Tax Act. Although such a plan can exhibit solvency deficiencies, nothing can be done in many cases to fund the solvency deficit. If it is decided that the solvency minimum funding rules are to be retained, we would ask that designated plans be exempted from the solvency funding rules.
Westcoast Actuaries Inc.
Stephen Cheng FSA ,FCIA
George Wang FSA, FCIA
Neil Chicoine FSA, FCIA
Johnny Yang FCIA, FSA