The chair of the Pension Investment Association of Canada, Terri Troy, discusses the organization’s achievements since its creation 30 years ago and the challenges that lie ahead for Canadian pension funds.

What has been PIAC’s greatest accomplishment over the past 30 years?

Our members are at the heart of everything we do, our most important accomplishment is meeting member needs. PIAC is a not-for-profit self-help organization created by plan sponsors for plan sponsors.

Two important measures of our success have been membership growth and level of involvement by our members. PIAC’s membership has grown from a few member funds in 1977 to 140 member funds today representing $910 billion in pension assets. Thirty per cent of our members are actively involved in committees, speaking at PIAC conferences or researching articles and papers for PIAC members. Over 80% of members attend PIAC conferences at least once every two years.

PIAC has been successful at accomplishing its mission (see sidebar). PIAC continues to be a strong proponent for improved corporate and pension governance, and sound investment practices. PIAC’s educational publications and advocacy work are highly regarded. For example, PIAC’s Corporate Governance Standards were ground breaking when first published in 1993. PIAC’s Corporate Governance Committee was the precursor to the establishment of the Canadian Coalition for Good Governance.

Over the years, PIAC successfully lobbied the Federal Government to reduce and eventually eliminate the 30% Foreign Property Rule. We continue to lobby for the elimination of the remaining investment limits contained in the pension law because the limits do not make sense, the concept of managing investments in a prudent manner is considered best practices, and the limits add unnecessary costs.

What is the greatest threat facing Candian pension plans?

Declining pension coverage of Canadians, especially those who work in the corporate sector, is of grave concern. Recent statistics suggest that only 40% of Canadians are covered by occupational pension plans. And only 27% of Canadians employed by non-public sector employers have employer sponsored pension plans.

Why is this happening?

Plan sponsors are reacting negatively to an environment that they see as uncertain, unfair, and costly. If plan sponsors assume the risk of funding deficits, they believe that they should have entitlement to any excess funds in the pension plan, if these funds are not required to pay pension benefits. However, recent court decisions favour the distribution of “surplus” to plan members even though plan members did not contribute additional funds when the plan was in deficit.

Other challenges include new accounting rules that will result in increased volatility of pension expense on corporate plan sponsors’ financial statements. A logical response for a CFO is to take steps to minimize this volatility since it will have an uncertain impact on Earnings Per Share, which ultimately impacts a company’s share price and return to shareholders.

What can be done to maintain and improve coverage?

Pension deals need to be clarified so that risk-sharing is clearly understood by plan members and plan sponsors. This may result in shared contributions to ensure alignment of interests. Contribution volatility needs to be minimized either through plan design changes and/or less restrictive rules pertaining to the funding of solvency deficiencies, including the use of such tools as Letters of Credit and earmarked contingency reserves where the plan sponsor has a clear right to entitlement of excess funds not required to fund the pension benefit.

PIAC made eight recommendations to the Ontario Expert Commission on Pensions. What is the most important recommendation and why?

The most important recommendation is to address funding issues. PIAC recommends that surpluses should be fairly allocated among those who assume the risk of funding deficits. Current rules, such as the requirement to distribute “surplus” upon partial windups and Income Tax Act limits on the amount of tax deductible contributions, act as disincentives to improve plan funding. PIAC also recommends that a plan sponsor’s creditworthiness be taken into consideration when determining funding requirements.

Who is PIAC?

PIAC stands for the Pension Investment Association of Canada. PIAC has been the national voice for Canadian pension funds since 1977.

PIAC’s mission is to promote sound investment practices and good governance for the benefit of pension plan sponsors and beneficiaries.

Our members are 140 pension sponsor organizations that collectively manage pension assets of $910 billion.

PIAC is open to plans of all sizes and range from small single university plans to the two largest fund organizations in the country, the CPPIB and the Caisse. 80% of the large plans with assets over $1 billion are members.

PIAC members exchange information amongst themselves to help them improve the funded status of their plans so that their pension plans can pay pensions at a reasonable cost for both plan sponsors and plan members. PIAC members learn how to improve returns, reduce risk, and reduce costs. Information is exchanged via conferences, seminars, presentations, and ongoing networking either in person or via PIAC’s on-line information exchange.

A simple way to implement a creditworthy test is to exempt public plans from the requirement to fund solvency deficits, since the risk of public plans being wound up is remote. However, PIAC encourages the Commission to research the appropriateness and practicality of using the concept of creditworthiness for all plans, including corporate plans.

In the event pension regulations are not changed to fix surplus ownership and to exempt public plans from funding solvency deficiencies, pension regulations should allow for the use of Letters of Credit or earmarked contingency funds where plan sponsors continue to have a claim on assets not required to fund pensions.

How big an impact has the credit crunch had on Canadian pension funds?

Most readers will identify the credit crunch with non-bank sponsored asset backed commercial paper(NBABCP). Investors in NBABCP were under the belief that they could convert it to cash or another similar product at the end of 30 or 60 days but instead found that they couldn’t. This caused cash flow difficulties for some investors. These investors, in conjunction with their suppliers, are working together to form a solution. The newspapers have identified certain pension plans and other investors who have been affected by non-bank sponsored asset backed commercial paper(NBABCP). Is this a widespread problem? No. But it is an issue for those investors who invested in NBABCP.

In general, all pension plans have been impacted by the widening of credit spreads. Credit spread widening was expected since spreads were extremely low. Pension plan investors continually look for ways to improve returns and reduce risk in all types of environments.

The Mission of PIAC is “to promote sound investment practices and good governance for the benefit of pension plan sponsors and beneficiaries.” Do pension funds need to change their investment and governance practices in light of the lessons learned from the credit crunch?

In the case of NBABCP, there are lessons to be learned. Credit rating agency research has limitations. Investors should complement credit rating research with their own due diligence. As with any investment, investors need to understand what they are investing in and, in the case of NBABCP, investors need to understand what the backing asset is.

What do you see as PIAC’s key role in the years to come?

I believe that PIAC will exist in its current form. However, due to the dynamic nature of global markets, the content that PIAC delivers will change.



© Copyright 2007 Rogers Publishing Ltd. A shorter version of this article first appeared in the November 2007 edition of BENEFITS CANADA magazine.