In Ontario’s new defined benefit plan funding rules, the provisions for adverse deviation should be based on the plan’s asset mix, and a riskier asset mix should naturally require a higher PfAD, according to the Association of Canadian Pension Management’s submission to the provincial Ministry of Finance.

“Using that logic and an understanding that fixed-income investments generally correlate well with pension liabilities, equity investments should require a higher PfAD than fixed-income investments,” noted the letter.

The consultation’s proposal included the requirement for DB plan funding to include a buffer over the plan’s liabilities using a PfAD, a percentage used to determine additional contributions in respect of the normal cost and going-concern liabilities of the plan.

The ACPM’s letter noted the wording in the rules is causing “what appears to be an unintended result.” The Financial Services Commission of Ontario is taking the position that this wording causes any non-investment-grade fixed income investment to taint all fixed-income investments, resulting in their treatment as equity investments, according to the ACPM.

As well, it’s unclear where infrastructure assets should fall. “Since they have a number of characteristics that are similar to real estate, it would make sense to treat them similarly for purposes of the PfAD calculation.”

In its letter, the ACPM suggested minor wording changes, which it believes would clarify the PfAD calculation and remove the potential penalty for investing the pension fund’s assets in a way the administrator may otherwise deem a prudent approach in managing investment risk and diversifying sources of return.

It also proposed adding a new category for non-investment grade and non-rated bonds. “We would argue that this is a reasonable result as the risk associated with a non-investment grade bond or non-rated bond should be less than the equity of the corporation issuing the bond since the bond would still have a higher priority on capital in the event of insolvency of the corporation,” noted the letter. “In addition, a number of non-rated bonds (private debt) have characteristics and covenants that would provide investors with a similar risk profile as investment grade bonds.”

Finally, the ACPM recommended that investment grade bonds be interpreted as bonds or debentures that meet the minimum rating requirement set out in the rules, suggesting a new definition is created to clarify this point.