The government of British Columbia is kicking off a conversation on reforming the province’s solvency funding rules in an effort to encourage private sector companies to continue to offer defined benefit pension plans.
The consultation, which is open to the public, look to discuss a number of technical reforms that could improve predictability for plan sponsors and enable them to offer sustainable benefits to their members, according to the provincial government.
It lays out five options for reform. The first option would lengthen the amortization period in which a plan sponsor is required to pay a solvency shortfall from five to 10 years. This proposed change is aimed at decreasing the volatility and size of solvency payments for underfunded pension plans.
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The second option would be a consolidation of solvency deficiencies under the Pension Benefits Standards Act. Currently, if a plan has a shortfall at a valuation date, it must be fully paid based on a five-year amortization schedule. However, if the shortfall remains at the next valuation date, that five-year amortization schedule is newly established. Also in the second option, shortfalls could be consolidated and paid based on a new amortization schedule established at each valuation date, instead of requiring a successive series of solvency payments. This would address the same issues as the first option.
The third option would base solvency funding on smoothed asset values. At present, B.C.’s pension act states that plans must determine solvency shortfalls based on the market value of their plan’s assets. But since market fluctuations can result in major volatility for solvency funding requirements, a method of valuing assets that takes short-term market volatility into account could smooth volatility in solvency requirements, suggests the consultation. This method would allow for a period no longer than the typical length of an economic cycle.
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A fourth option would be to base solvency funding on an average interest rate. Currently, solvency valuations use interest rates recommended by the Canadian Institute of Actuaries for the basis of a hypothetical windup valuation. The new option would base these valuations on an the average interest rates from the CIA over a specified period of time. The period would be long enough to be effective in dampening the volatility of solvency funding requirements, but not so long that the impact of changing interest rates may be delayed inappropriately.
Finally, for the fifth option, the current 100 per cent required level of solvency funding could come down to a lower percentage. Given that few employers are at risk of insolvency at a particular time, noted the consultation, the option could protect benefit security while bringing down the extremes in employer contributions.
Read: Plan sponsors using strong solvency positions to tweak investment, funding strategies