Pension plan sponsors advised to stress test as regulators shift focus to second wave

With federal and provincial regulators introducing relief measures this year to support pension plans amid the financial upheaval resulting from the coronavirus crisis, the Financial Services Regulatory Authority of Ontario saw a lot of action from plan sponsors registered in the province.

“In terms of whether plans are taking advantage of the relief — they are in Ontario. . . . We had 75 plans requesting extensions to member statements,” said Caroline Blouin, executive vice-president of pensions at the FSRA, during an Association of Canadian Pension Management virtual roundtable on Wednesday.

“In terms of defined contribution plans, we’ve had just under 20 amendments to reduce or suspend their contributions, so the measure is helping some companies [and], in terms of commuted-value transfers, we’ve received over 230 applications so far.”

Read: Navigating pension fiduciary duties during coronavirus pandemic

Meanwhile, out in B.C., many plan sponsors requested various filing extensions, four plan sponsors asked to reduce contributions — though none eliminated them — and three plan administrators for seven plans invoked provisions to withhold commuted-value transfers for terminating members, according to Michael Peters, vice-president and deputy superintendent of pensions for the B.C. Financial Services Agency.

“The new measures [since the pandemic started] are really meant to help businesses during this time with cash flow while providing certain safeguards for plan members, so it’s a very balanced package,” said Blouin. “The potential of new restrictions with the second wave [means] we may see pension deferral become very helpful for certain companies in the coming months, depending on how it unfolds.”

With the second wave of the pandemic hitting many parts of the world, including Canada,  she advised plan administrators to stress test under a number of scenarios for both plausible and severe scenarios to really understand the implications on the pension plan. In addition, she suggested they look at the range of future funding contributions that may arise over the coming years and how that all fits into the company’s financial forecast.

Read: OSFI easing restrictions on pension portability transfers

“Our focus now is really on the health of the pension funds, on the health of the plan sponsors with DB plans and monitoring the financial sectors that are facing headwinds during the pandemic. So, for example, we are paying attention to the retail sector and the manufacturing sector.

“If I look at the medium solvency ratio as an indicator of the health of pension plans in Ontario for Q3, it looks like we’ll see improved solvency levels at the end of Q3, [but] now there’s still a lot of uncertainty in the market. The equity markets bounced back really nicely since the end of March, but we have a U.S. election just a few weeks away and the interest rates are really low and . . . then we have the Bank of Canada last week signalling that negative interest rates are not out of the question.”

It is unclear when life and business will return to normal, so pension plan administrators have to prepare for more financial storms on the horizon — perhaps even into 2022, said Blouin. 

Read: Ontario allowing DB pension sponsors to defer contributions until 2021

“It’s really important for plan administrators at this time to understand what further market shocks could do to the pension plan [as well as look at] the implications of the interest rate environment, which is really important on the liabilities. We don’t know what all of the results of the pandemic will be . . . it’s still being assessed. It may take some time for all of this to shake out.”