The Canadian Institute of Actuaries has responded to Nova Scotia’s consultation on a new defined benefit pension funding framework, including how a target-benefit funding model could be linked to an enhanced going-concern funding model.
The province’s consultation, which began in September 2017, put forward a number of options for a new framework, including: maintaining the current solvency funding standard but introducing measures to help reduce the volatility and variability of funding payments, eliminating solvency funding and enhancing going-concern rules or reducing solvency requirements.
Nova Scotia’s consultation has followed in the footsteps of several other provinces. In May 2017, Ontario announced pension reforms, including that defined benefit plans will now have to fund themselves on a solvency basis only if their funded status falls below 85 per cent. Ontario’s reforms came more than a year after Quebec’s shift to going-concern funding obligations for defined benefit plans on Jan. 1, 2016. And regulators in Alberta and British Columbia have also moved to loosen their solvency funding rules, while Manitoba released a report this week that also addressed the issue.
If full solvency funding continues in Nova Scotia, the Canadian Institute of Actuaries supports the concept of a solvency reserve account.
“Plan sponsors are very concerned that they are required to make large solvency payments, especially in the current low interest rate environment,” wrote Sharon Giffen, president of the Canadian Institute of Actuaries, in the submission. “A significant increase in interest rates may by itself eliminate current solvency deficits. Under that scenario, those solvency payments would only contribute to a surplus.
“The CIA has suggested that these payments be accumulated in a special account and that the account be refunded to the entity that has made those payments if all accrued benefits are fully secured,” the submission stated. “In particular, on plan windup, if all accumulated benefits have been settled, the part of the remaining surplus attributable to those payments could be refunded.”
On the other hand, if Nova Scotia opts to remove solvency funding requirements, the Canadian Institute of Actuaries supports the concept of enhanced going-concern funding. It noted in its submission that in its response to Ontario’s proposals for a new solvency funding framework, it discussed several issues, including the requirement to have a funding cushion, otherwise known as a provision for adverse deviation.
“Including a new PfAD in future going-concern valuations is a good way to address the risks involved,” wrote Giffen. “The PfAD should reflect the risks by being linked to the degree of asset liability mismatch and potentially other factors.” The submission also noted that the institute isn’t in favour of removing solvency funding without implementing a provision for adverse deviation.
In response to the option of shortening the funding period, the Canadian Institute of Actuaries again referred to its response to the Ontario proposals, noting it considers 15 years to be a reasonable compromise between affordability, stability and security. “There appears to be no strong actuarial rationale upon which to base a reduction in the amortization period,” wrote Giffen.
“Lowering the allowable amortization period would simply limit a plan sponsor’s flexibility and the plan stakeholders’ ability to decide the relative priority of its key funding objectives,” the submission stated.
Nova Scotia’s consultation also looked at a number of other regulatory issues, including target-benefit plans. The Canadian Institute of Actuaries said it supports regulations that allow for the enactment of legislation related to such plans in the province, noting it would be relatively simple to link a target-benefit funding model to an enhanced going-concern one, if that’s the framework Nova Scotia pursues.
“For example, a target-benefit plan could be restricted from enhancing benefits from surplus below the prescribed PfAD, and may require additional measures (enhanced contributions, benefit accrual reduction or benefit reductions) in the case where the going-concern ratio falls below 100 per cent or some other prescribed ratio (e.g., 90 per cent),” wrote Giffen.
“We see no actuarial reason to restrict target-benefit plans to unionized environments, but understand that in a non-unionized environment, it may be preferable to either provide for employee representation in the governance model or at the very least require the establishment of a pension advisory committee to ensure there is employee input into the administration and communications about the plan.”
The submission also noted the absence of transfer values in Nova Scotia’s consultation and said that, if the province adopts an enhanced going-concern model, it may be appropriate to revisit the calculation of them.
“As pension plans would no longer be expected to be fully funded on a solvency basis in a five-year time horizon, it may not be logical to provide a commuted value assuming a 100 per cent transfer ratio. A potential solution would be to pay the commuted value times the most recently determined transfer ratio — and not to provide the unfunded portion of the commuted value in five years.
“Terminated members always have the option of selecting the deferred pension, and potentially could be offered the commuted-value option periodically, say every five years, as the transfer ratio might improve in future years.”