While Ontario’s proposed solvency changes for defined benefit pension plans may help plan sponsors with funding obligations, they may put plan members in a more precarious position, says Michael Mazzuca, a partner in the pension and employee benefits group at Koskie Minsky LLP in Toronto.

“There’s obviously a suggestion that, in addition to the emphasis on going concern, there’s going to be a [provision for adverse deviation] requirement,” he says, noting it would act as a contingency reserve. 

Read: Ontario announces long-awaited DB solvency reforms

“I think that enhances the funding obligations, and any time you enhance the funding obligations and put more money into the plan, that enhances the security of the benefits for the plan members. I think that’s the positive, but we don’t know how big a contingency reserve or margin that [provision] is going to require.”

The changes also increase the risk to plan members if their employer enters into bankruptcy. While the amendments would increase coverage through the pension benefits guarantee fund, Mazzuca isn’t sure those enhancements are sufficient, since plan members would only receive coverage to a maximum of $1,500 per month.

“It’s a complicated area, and the backgrounder we saw on Friday is only a page long or so,” he says. “The devil’s in the details, and there’s a lot of details that still need to come out.”

Read: Eliminating solvency funding on the table as Ontario review DB rules

Mazzuca also points out that multi-employer and jointly sponsored plans aren’t part of the proposed changes. He notes it makes sense for those types of plans to have different rules, since their risks differ significantly. For example, one company going under won’t have a significant impact on a multi-employer plan.

“Most MEPPs in Ontario have now had temporary solvency funding relief for close to 10 years, if not longer,” he says. “I think that’s worked, so for MEPPs, we’d like to see solvency funding done away with on a permanent basis, as opposed to continually renewed temporary situations. With a MEPP, where the contributions are typically fixed under a collective agreement, you can’t go back to the employers generally for additional funding, so the risks are quite different.”

What do you think? Do Ontario’s revamped pension funding rules make sense? Should other provinces follow suit? Have your say in our weekly poll.

Read: A look at Quebec’s pension solvency changes one year on

Last week’s poll looked at whether it’s time for Canada to offer more generous vacation provisions. The majority (78.5 per cent) of respondents said yes, as minimum employment standards provide too little time off and Canada needs to catch up to other jurisdictions. The remainder (22.5 per cent) said no, as many companies wouldn’t be able to afford to fund more generous leaves.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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Finally….a pension professional of the stature of a Michael Mazzuca injects long needed sanity into the solvency debate. Relaxation of the solvency rules will imperil deferred accruals and current pensions-in-pay for a number of plan members. We don’t know how many yet, but as Victor Garber so soberly opined in Titanic, “it is a mathematical certainty.”

Anyone who is trying to sell going concern valuations alone, with or without adverse factor contingencies, as an equally sound measure of income security is either ignorant (and therefore not entitled to comment on it), conflicted,or a liar. Same goes for people who propagate the supposed advantages of so-called “target benefit” pension plans.

We’re adults. We all know that the benefits of certain plan members are imperilled. Instead of misrepresenting the responses, such as dumbing away solvency rules, as solutions that will somehow mitigate that fact, why not try a dose of Mazzuca-like semantic honesty. Instead of Target Benefit plans, few of which will hit their targets, why not try “Variable Accrued Income” pension plans, with the % accrual varying by year according to universally understood measures. At least the constant of post-retirement income on an cumulative accrued basis will remain intact, and it’s not as though we as an industry have never done it before. In the 1990s, for instance, London Life managed over $1 billion in assets that backed deferred paid-up pension benefits. The return opportunity cost would exist, but so what? Look at all of those DC members who thought they could outsmart the professionals. Most of them now live “in the van down by the river” vacated by Chris Farley.

Tuesday, May 23 at 12:56 pm | Reply

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