While the Pension Investment Association of Canada strongly supports Nova Scotia’s recent pension funding changes, it’s calling on the provincial government to tweak the provision for adverse deviation calculation and access to solvency reserve accounts.
Nova Scotia’s pension funding changes took effect on April 1, reducing solvency funding to 85 per cent, with any shortfalls required to be funded over five years and enhanced going-concern funding to be funded over a period of 10 years, up from 15 years previously.
The changes also introduced a PfAD calculated by combining a fixed five per cent with a percentage based on the pension plan’s combined target asset allocation for non-fixed income assets.
Read: N.S. moving forward with new DB pension solvency regime
In a letter to the Nova Scotia government, the PIAC said it’s in favour of the province’s approach to the PfAD and its broad alignment with other provincial regimes, but it called for further optimization.
“The regulations, for example, do not appear to give credit for better alignment of fixed income portfolio duration with liability duration, which is an important consideration for most plan sponsors in their basic portfolio construction,” wrote Simon Fréchet, chair of the PIAC, in the letter. “And conversely, the regulations appear to give some credit, as if being similar to fixed income, to asset classes which we would not consider particularly well-aligned with liability characteristics (such as venture capital and resource investments).”
The letter suggested that the Canadian Association of Pension Supervisory Authorities review the variety of approaches and recommend a more standardized measure, given the widespread adoption of PfADs in other provinces.
The PIAC also expressed support for Nova Scotia’s move to introduce solvency reserve accounts, but noted a concern over the fact that accessing these accounts only appears to be permissible upon plan windup. “[The] PIAC believes that flexible reserve account structures, which allow for access if certain funding thresholds are met, will best encourage sponsors to make use of such accounts and we think that broad take-up is well-aligned with regulatory objectives.”
Read: PIAC calling for tighter link to asset allocation for PfAD in B.C. solvency funding framework