While solvency funding relief helped Canada’s pension funds withstand the turbulence of 2020, a long-term vision with an eye to a more robust funding framework would offer better support, according to pensions experts.

Responding to the crisis, the federal government launched a consultation last fall on measures to alleviate pension solvency funding requirements for defined benefit pension plans. As of press time, in mid-April, the government was still reviewing the responses it received, according to a Department of Finance spokesperson. And while many pensions ended fiscal 2020 in a financial state similar to — and in some cases, surpassing — fiscal 2019 results, some pension plan sponsors are facing the ongoing problem of reallocating funds to other areas of their business in order to stay afloat, says Simon Nelson, principal in pensions at Eckler Ltd.

Read: Feds releasing consultation on pension solvency relief measures, VPLAs

“It’s not like the pandemic created a massive pension funding deficit, which is what we’ve seen in past crises when the funding relief measures were required. There’s an argument to be made, particularly in some sectors, that capital and cash flow is much better directed elsewhere. It doesn’t make sense to direct it to the pension plan when it’s better spent elsewhere to ensure the business is viable for the long term.”

Short-term solutions

Among the temporary relief measures suggested in the consultation is a one-year renewal of the solvency amortization period (which the feds enacted between April 1 and Dec. 30, 2020) amid a flurry of pandemic relief measures. It’s a proposal that’s been cautiously received by industry stakeholders.

By the numbers

The percentage of Canada’s pension plans that are regulated by the federal government

$2.12 trillion
The market value of assets held by Canadian employer pension plans, as of the third quarter of 2020

The percentage of paid Canadian employees in a DB pension plan in 2019, compared to 28.8 per cent in 2008 and 34.7 per cent in 1998

Sources: Department of Finance Canada, Statistics Canada

Geoffrey Melbourne, partner and wealth Canada growth leader at Mercer Canada, says for 2021 — and for the federal regime in particular — the moratorium on solvency payments allowed in 2020 was quite welcome. “[The amortization period] has had immediate impact for plan sponsors who need [solvency funding relief], but continuing it beyond 2021 would be quite useful while the government looks at the broader framework.”

Read: PIAC calling on feds to reform pension solvency rules, introduce VPLAs

Meanwhile, in its response to the consultation, the Pension Investment Association of Canada said although it supports temporary relief measures, it cautioned against an approval requirement for the one-year extension of the solvency amortization period and the overuse of letters of credit.

Nelson says that the extension should be among a suite of options that plan sponsors could choose from, cautioning against a one-size-fits-all approach to solvency funding relief and the potential creation of future problems. “That suite could run the gamut from extending the amortization period to providing relief or deferral of certain contributions, allowing them to not file a valuation and continue contributing based on a prior valuation. What works for one plan sponsor won’t necessarily work for another. What we’ve suggested is that any measures need to look at both the short and long term, so you’re looking at what helps in 2021 without creating a cliff in 2022.”

Possible solutions

Melbourne says the disparate DB plan solvency funding models used in Ontario and Quebec — a minimum 85 per cent funding requirement and exemption from funding on a solvency basis, respectively — could also provide a possible way forward. “They’re certainly worthy of consideration. Anything along those lines would be quite useful and, in both cases, they have measures to study going-concern funding to create a reasonable balance between financial security for the plan members and keeping the plans affordable and sustainable for plan sponsors.”

And Nelson says consideration of the going-concern funding model for federally regulated plans would bring them in line with most other jurisdictions. “We’ve been encouraging the federal jurisdiction to look at what’s needed on a short-term relief basis and what’s also needed in terms of reviewing the funding framework.”

Read: Projected Ontario DB pension solvency ratios hit significantly in Q1: FSRA

The PIAC took a similar stance in its response to the consultation, stating that such actions indicate a need for fundamental reform to the federal solvency rules and harmonization among jurisdictions, suggesting changes such as moving to a going-concern plus regime and setting a solvency target below 100 per cent on a temporary basis while building towards greater regulatory consistency.

Defending against future crises

While the economic effects of the pandemic will continue to unfold for months and years, longer-term solutions are needed to safeguard pensions from future crises, says Michael Mazzuca, managing partner at Koskie Minsky LLP. He says a bigger issue is the ongoing decline of DB plan membership in Canada.

“We have to look beyond the pandemic at this point. Although there’s no ‘new normal,’ I don’t think temporary, knee-jerk relief is what’s needed for [defined benefit] plans. It could be through a process much like British Columbia and Ontario have done, where all stakeholders are consulted, including plan sponsors, trade unions and retiree unions and [they all] come up with a long-term funding strategy that works for those plans.”

Read: A look at the landscape for pension solvency funding reform across Canada

And Nelson says while relief is needed now, a view toward the sustained viability of these plans is key. “If you have a funding framework and there’s a crisis, whether it’s a pension-funding crisis or economic crisis, if you have to provide relief, that raises the question as to whether the funding framework works the way it should. While pension funds will inevitably face ups and downs along the way, a stronger framework will ensure a smoother ride going forward.”

Blake Wolfe is an associate editor at Benefits Canada.