The Canadian Institute of Actuaries has responded to Ontario’s description of its proposed funding rules for defined benefit plans.
While the provincial government’s document, published in December 2017, included details on how the provision for adverse deviations would work under proposed new going-concern rules, the Canadian Institute of Actuaries’ submission says more information is required on how these were established. “We encourage the Ministry of Finance to provide stakeholders with additional information on how the PfADs were established, in order to properly comment on whether they are appropriate,” wrote Sharon Giffen, the organization’s president, in the submission.
Also with regards to the provision for adverse deviation requirements, the submission suggests the government clearly define the concepts of open versus closed plans, as well as alternative investments. It notes whether a plan is opened or closed isn’t an accurate proxy for the risk inherent in the plan. “We surmise that the distinction could be a policy decision to provide an incentive for plan sponsors to keep their plan open to new members.”
The definitions of an open versus closed plan should be further clarified so they aren’t misinterpreted or abused, the submission suggests. “We are concerned that the difficulties of properly defining a closed versus open plan might overcome the small advantages of incenting DB plans to remain open. As an example, the treatment of a plan that would be open to 25 per cent of the workforce while closed to 75 per cent of the employees could raise issues,” wrote Giffen.
On the issue of alternative investments, the Canadian Institute of Actuaries is concerned their treatment may not have been thoroughly researched, and it encourages the Ministry of Finance to hire experts to define alternative investments and how these should affect the provision for adverse deviation.
The organization also notes the government’s document doesn’t include the concept of a special account into which contributions paid above minimum current service cost are tracked separately, and could be used at the discretion of the plan sponsor, potentially as a contribution holiday, and returned to the employer on plan windup after all liabilities are settled. It supports the concept of a special account in order to improve plan funding and to address the issue of surplus asymmetry, and notes provincial regulators in Alberta, British Columbia and Quebec have already adopted such accounts.
In response to Ontario’s proposal to increase the guarantee provided by the pension benefits guarantee fund from $1,000 to $1,500 per month, the Canadian Institute of Actuaries notes the fund should be subject to more rigorous actuarial analysis. “It is incumbent on the government to ensure that the premiums paid reflect the risk of the various plans,” wrote Giffen in the submission. ”Rather than simply increasing the premiums across the board, we suggest that additional sophistication of the PBGF assessment is warranted if the PBGF is to continue. Actuarial input on setting the appropriate premiums would be warranted and the CIA would be pleased to assist.”
In terms of Ontario’s proposed details around annuities, the submission notes these are generally in line with the Canadian Institute of Actuaries’ expectations. However, while it agrees with the notion that no annuity purchase should be made at the expense of remaining plan members, it suggests the plan’s solvency ratio after purchase should at least be equal to the solvency ratio immediately before purchase, not the greater solvency ratio immediately before the purchase and 100 per cent, as Ontario has proposed.
“In our opinion, adding the 100 per cent requirement does nothing to address whether the remaining plan beneficiaries are negatively affected. As an example, if a plan was 105 per cent solvent before the purchase, it should be enough to remain at 100 per cent after the purchase (or 85 per cent as is targeted after reform). On the other hand, if a plan was 75 per cent solvent before the purchase, then the target should be to remain at 75 per cent after the purchase (not raise the level to 85 per cent).”
Also on annuities, the submission believes the time frame of 30 days by which an employer must remit any contributions needed to meet this requirement is far too short, and suggests 90 or 120 days would be more reasonable. It also suggests allowing the purchase of an equivalent annuity where the original form isn’t available on the market, with the approval of the form of the purchased annuity based either on member consent, pursuant to finding reasonably priced annuities or by the superintendent.
“As an example, such a situation could occur in instances where complex contractual indexing formulas exist in the plan,” wrote Giffen in the submission. ”On entitlement to surplus on annuity purchases, a limit of three to five years (or other statute of limitation) should be implemented for any surplus distributions pursuant to annuity purchases. Significant administrative complexities will emerge from having no time limitation on right to surplus for annuity purchases.”
And the Canadian Institute of Actuaries also raises the issue of a discharge when purchasing annuities for active members with frozen benefits from defined benefit plans. “The proposals clearly contemplate a discharge only for deferred and retired members, but active members with frozen DB benefits are often (but not always) identical to deferred members.”