The Pension Investment Association of Canada is calling out Ontario’s proposed defined benefit solvency funding framework for its lack of solvency reserve account structures, a model that exists in the regulatory landscapes in Alberta, British Columbia and Quebec.
In a letter to Charles Sousa, the province’s minister of finance, the association’s chair Brenda King notes it has advocated in favour of these accounts for a number of years, “as we believe that they can be a useful tool to help manage the inherent procyclical nature of pension funding obligations by encouraging plan sponsors to fund beyond statutory minimums during periods of good economic growth through mitigation of the asymmetries related to trapped surplus.”
In regards to Ontario’s proposal of increasing the guarantee provided by the pension benefits guarantee fund to $1,500 per month from $1,000, PIAC recommends that defined benefit plans be able to pay the premiums out of their plan, provided they’re at least 85 per cent funded on a solvency basis.
“We would also suggest that confidence in the PBGF regime would be enhanced if there was greater transparency around the fund’s financial position and rate-setting mechanisms, including the analysis underlying the proposed changes to the premium structure,” notes the letter. ”The introduction of a charge based on plan liabilities regardless of funding status in particular has raised concerns among a number of our members.”
Ontario’s proposed amendments also include providing legal discharge to plan sponsors that purchase an annuity for retired or former members. PIAC supports this provision, but notes it’s unclear that there’s a benefit to requiring sponsors to fund to a predetermined 85 per cent level prior to initiating an annuity.
“Provided that the solvency level post-annuitization is no lower than it was pre-annuitization, benefit security for non-annuitized members is unchanged, and has arguably been enhanced to the extent that the sponsor will have made progress in de-risking the plan and reducing the size of the go-forward liability,” notes the letter.
It also encourages the province to reconsider the proposal to allow members to retain entitlement to plan surpluses in the event of a future windup following an annuitization. “Fundamentally, we think this provision would exacerbate the asymmetries around ownership of surplus and deficits, which have long been problematic for defined benefit plans.
“Plan members whose pensions have been annuitized are receiving full pension entitlement and are no longer exposed to the potential downside risks of an underfunded plan,” the letter continues. ”As such, it is unclear from a policy perspective why they should benefit from future plan surpluses.”
If the government is concerned about plan sponsors using annuity purchases as a means to appropriate surplus, PIAC suggests alternative ways to mitigate these risks, including: applying the provision only in cases where there is a material (110 per cent or greater) surplus on a solvency basis in the plan following an annuitization; allowing plan sponsors to share any surplus value at the time of annuitization through the annuity economics and thereby eliminating any future surplus entitlement; and applying the provision only in cases where a relatively short period of time (five years or less) has passed between the annuitization and the plan windup.
In addition, with regards to the framework for determining the appropriate provision for adverse deviation, PIAC is encouraging Ontario to align with other jurisdictions following this approach, particularly in Quebec. It would also be useful, according to PIAC, for the benchmark discount rate to be compared to the best estimate discount rate without margins to avoid double counting provisions for potential adverse plan experience. As well, the submission notes the provision for adverse deviation should be established to account for the overall interest rate coverage of assets relative to liabilities.
“For example, the PfAD could be set based on the degree of interest rate matching rather than just the allocation to fixed income assets alone,” it notes.
While the Canadian Institute of Actuaries’ submission in February suggested the provincial government clearly define the concepts of open versus closed plans with it comes to the provision for adverse deviation, PIAC’s submission notes the rationale for the distinction between open and closed plans in setting the approach is unclear because plan status isn’t a fundamental risk factor. “The assessment of the PfAD based on the risk profile is more appropriate,” the letter says.
And finally, PIAC’s submission suggests there may be some benefits to refining the proposed allocation of all alternative assets as 50 per cent fixed income and 50 per cent non-fixed income, noting the list provided by the government would suggest that resource properties are more appropriately considered 100 per cent non-fixed income while traditional mortgages are more appropriately considered 100 per cent fixed income.