Pension industry urging feds for relief from coronavirus fallout

The Association of Canadian Pension Management and the Pension Investment Association of Canada have sent the federal government their wish lists for actions to help federally regulated pension plans deal with the fallout of the coronavirus, with a focus on measures to help with cash flow, liquidity and a call for broader solvency reform.

As many companies are experiencing declines in operating cash flow, the PIAC’s letter recommended the government allows pension plan sponsors to opt out of making special payments for six to 12 months or until there’s more visibility on the economic recovery.

Similar to the PIAC, the ACPM’s letter called for suspending special payment obligations for at least the next six months. “Given the current uncertainty, we recommend that special payments only recommence six months after an announcement that the moratorium will cease,” it said.

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Over the medium term, the PIAC suggested the government be flexible and creative in how it allows plan sponsors to manage the probable large increases in their pension deficits.

Its proposed options included indefinitely postponing changes put forward by the Office of the Superintendent of Financial Institutions on actuarial standards, particularly with regard to the application of replicating portfolio discount rate methodology, providing all federal plans with the option to use the replicating portfolio approach for 2020 and 2021, extending the solvency amortization period to 10 years or longer, increasing the limit on the use of letter of credit and basing 2021 funding requirements off of December 2019 valuations.

Further, in response to liquidity constraints on fixed income instruments, the ACPM noted it would be helpful to eliminate or extend the normal 90-day limit on borrowing under the Income Tax Act.

“What would assist in liquidity for these plans is that they could borrow money for a period of time, so they don’t have to liquidate any of their investments in this environment,” says Susan Nickerson, a partner at Torys LLP and the chair of the ACPM’s board of directors.

Normally, she highlights, pension plans would liquidate their investments to meet these requirements. However, instead of forcing pension plans to liquidate investments during the downturn, it would be best to allow them to borrow against their assets to meet liquidity requirements.

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“But a 90-day timeframe is not helpful to them,” says Nickerson, noting it would be ideal to extend those 90 days to the next 12 to 18 months, allowing plan sponsors to choose when to repay the loan based on when their assets recover.

The 90-day rule has been around for a number of years, she notes. “And like a lot of the Income Tax Act rules that relate to registered plans, it’s time to take a look at them in today’s environment to determine whether they’re still relevant and what the original rationale — whatever it may have been for the restriction — still applies.”

The PIAC’s letter also called on the government to eliminate borrowing prohibitions for defined benefit plans under the Income Tax Act. “Similar to the case which existed for many years with regards to the foreign property rule, there is a disconnect between the tax rules, standard market practice and the position of policy and regulatory officials with regard to pension practice. This disconnect is not cost-free as it creates sub-optimal structures and additional cost for pension plans. Now would be an opportune time to eliminate this restriction.”

The PIAC also recommended that the Department of Finance works with the Bank of Canada so pension plans can directly access the bank’s contingent term repo facility to manage liquidity. “Market conditions remain fragile and most pension plans are managing cash tightly to avoid punitive asset sales to meet cash requirements. Direct access to the Bank of Canada would provide an important backstop in an environment where commercial bank counterparties are tightly rationing their balance sheets,” said the letter.

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In addition to these recommendations, the PIAC called for more fundamental reform to the pension solvency funding regime. In particular, it advocated for a single funding measure, which could include a funding level at the reduced threshold of 85 per cent to be combined with enhanced going-concern funding rules, solvency reserve accounts and legal discharge upon annuitization.

The ACPM also suggested minimizing solvency funding over the medium term. However, it highlighted that the “2009-style funding relief” would not materially help employers. “ACPM believes that this situation presents an opportunity to re-think solvency funding — a funding measure from which ‘relief’ has been granted at the bottom of nearly every economic cycle and market shock since its inception in the 1980s, in economic circumstances that differ greatly from the current persistent low long-term interest rate environment,” said the letter. “We urge similar measures to that which other pension jurisdictions either have already adopted or are in the process of adopting.”

In the ACPM’s view, this could include eliminating solvency requirements except for a minimal solvency ratio floor and basing funding on a going-concern model.

In addition to these recommendations, the PIAC also proposed administrative relief when it comes to timelines for filing returns, employee statements and actuarial valuations. And it called for increased flexibility to use electronic communications and declarations for plan administration.

Similarly, the ACPM recommended that the OSFI permit electronic communications. “As well, an extension on the legislative requirement to produce option election forms on termination or retirement within 30 days would be welcome, especially with questions arising from the freeze on transfer values,” it said.

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