Based on the five options put forward in British Columbia’s consultation on reforming pension solvency rules, the option to replace the current requirements with enhanced going-concern funding requirements is the favoured course of action, according to the Association of Canadian Pension Management.
In its letter to the B.C. government in response to the consultation, which was launched in October 2018, the ACPM noted the current regulations are likely unsound to begin with, given how much the the province is suggesting they would need to change.
“ACPM recommends the elimination of solvency funding rules and strengthening the going-concern funding rules rather than implementing modifications to the existing solvency funding rules. We do not believe the proposed modifications significantly remove the issues identified in the consultation paper background and introduction.”
B.C.’s consultation highlighted several specific issues worth consideration:
- Contribution volatility, caused by the need for a company to provide unexpected solvency funding due to the inherent uncertainty of investment results;
- Pro-cyclical contribution requirements and the issue of needing to make additional contributions compounded with the fact that the economic realities hurting investment returns also likely harm the health of the plan sponsor’s business, creating a compounding effect;
- Defined benefit plans are constrained by short-term funding rules that some could consider inappropriate given the long-term nature of the plan’s theoretical life and investing practices; and
- Funding in excess can lead to an overcorrection in solvency if interest rates increase.
The ACPM suggested a similar approach to the new rules on going-concern funding introduced in Ontario and Quebec would reduce the volatility of DB plan funding requirements, although the letter noted the association doesn’t believe those systems are perfect.
For example, it doesn’t recommend the inclusion of a provision for adverse deviation, as is currently part of B.C.’s Pension Benefits Standards Act. “Simply using these provisions in lieu of solvency funding requirements could increase funding requirements well beyond those under the new Quebec or Ontario funding models,” noted the letter.
While it may be preferable to implement a prescribed provision for adverse deviation calculation in line with other provinces to avoid further exacerbating the lack of pension legislation harmonization among jurisdictions, the ACPM suggested plan sponsors should have the option to develop a custom provision for adverse deviation for their plan, along with providing sufficient actuarial justification that adopted funding and investment policies will result in at least an 85 per cent chance that a fully funded plan will remain fully funded by the next actuarial valuation.
Further, as part of its preferred option, the ACPM said it’s clear on the reasoning for shortening the going-concern amortization period in lieu of eliminating it for solvency funding.
“Our preference would be to have an amortization period of 10 years, with a consolidation of the total unfunded liabilities, i.e., a ‘fresh start’ at each valuation rather than tracking and managing multiple amortization schedules.”