The Association of Canadian Pension Management says Ontario’s solvency funding framework for defined benefit pension plans should use Quebec’s new funding regime as a model.
In a letter responding to an open consultation on revamping the funding rules for the province’s defined benefit pension plans, the association weighs the pros and cons of two potential approaches. The first, Approach A, is to fund on both going-concern and solvency bases, and reduce required solvency funding. The second, Approach B, is to eliminate solvency funding requirements and require enhanced going-concern funding.
The first, notes the ACPM, has elements of the existing federal, Alberta and British Columbia regimes, while the second is largely similar to the Quebec regime that was introduced in January 2016.
Read: Quebec shakes up pension landscape with shift to going-concern funding
Read: Eliminating solvency funding on the table as Ontario reviews DB rules
ACPM prefers the second approach because it doesn’t believe the changes in the first approach significantly remove the issues identified in the consultation paper. “Approach A starts with the existing solvency rules and attempts to address the cost, volatility and asymmetric risk issues to the plan sponsor with options that will reduce, smooth or eliminate contributions that would otherwise be required,” wrote the ACPM in its consultation response.
“With all these modifications, one must therefore question the very rationale behind the solvency liability as a measure of the pension benefit to be funded in the first place. It is preferable to start with the ongoing measure of the pension obligation and then strengthen those funding rules to improve benefit security. Therefore, we agree with Approach B and strongly encourage its adoption.”
Read: 2016 Top 100 Pension Funds Report: Solvency reform on the agenda
Under the second approach, ACPM agrees that including a funding cushion through a provision for adverse deviation is important to ensure there is a buffer for poorer economic environments. It notes that, as under the Quebec legislation, there should be a special account where employer contributions for the provision for adverse deviation are accumulated to enhance benefit security when the plan is below a threshold surplus level.
However, the association does note in its letter that it has concerns with increasing the costs for plan sponsors that already apply appropriate governance and risk management principles to their plans, and are currently in a going-concern surplus situation. “Consideration should be given to allowing the PfAD for companies with a going-concern funded ratio of at least 100 per cent to fund the rest of the PfAD through actuarial gains rather than an increase in current
Ontario isn’t the only province consulting on its pension solvency regime. Saskatchewan opened a consultation in August that included proposals to eliminate solvency funding for the province’s negotiated cost pension plans. Currently, all negotiated cost plans must fund on both a going-concern and a solvency basis.
Read: Pension solvency funding a growing challenge as B.C. deficits mount
Read: Saskatchewan proposes elimination of solvency funding for certain pension plans