The Pension Investment Association of Canada is commending Nova Scotia on its proposed changes for improving the province’s pension funding framework.

In a letter, the PIAC noted it supports the provision for statutory discharge following an annuity buyout, as well as the province’s move to to reduce the solvency threshold to 85 per cent and enhance pension plan funding with margins added to going-concern funding.

However, the province’s proposed framework included applying enhanced going-concern funding even in cases where a plan doesn’t choose to move to an 85 per cent solvency standard, or can’t do so because of member approval requirements. The letter said this change could increase funding requirements, which is the wrong direction for policy-makers to take. Instead, the PIAC suggested maintaining the current going-concern standard for plans that remain on a 100 per cent solvency standard.

Read: N.S. moving forward with new DB pension solvency regime

The PIAC is also supportive of the introduction of solvency reserve accounts, though it noted the proposed framework wouldn’t allow employers to access them, which could make plan sponsors less interested in their use. Instead, it encouraged the province to allow access if the plan in question meets the prescribed funding threshold, which is the case in other Canadian jurisdictions.

“For most employers, plan windup is a sufficiently distant event that any funds in a reserve account under the current proposal will likely be viewed as trapped from a commercial perspective even if they are not literally trapped from a legal perspective,” the letter said.

The PIAC also suggested that Nova Scotia allow funds in reserve accounts to be transferred so plans can meet the minimum employer funding requirements to the extent they are current with all statutory funding requirements. “A major advantage of a reserve account construct is to permit employers to over-fund during good years and draw on the account in years when cash flow is more constrained. Maximizing the flexibility of reserve accounts will increase usage and therefore improve protection for members.”

Read: Ontario’s new DB funding rules should base PfAD on plan’s asset mix: ACPM

With regard to the provision for adverse deviation, the province is considering two methods of calculation. The first accounts for duration of assets relative to the duration of liabilities, while the second would depend on the amount of variable income securities, in addition to the fixed amount applicable to every plan.

The PIAC said it believes the first option is preferable because it more closely correlates to the overall pension portfolio’s construction, although both are possibilities. Further, the PIAC suggested the level of cash a plan has should have some bearing on the PfAD.

In addition, the PIAC noted the province’s proposal of a three-year transition period for pension plans that to pay increased contributions under the new framework is reasonable. It also recommended that Nova Scotia set the contribution holiday threshold at 105 per cent on either a going-concern or solvency basis.

Read: Ontario’s proposed DB funding rules lack solvency reserve accounts: PIAC

Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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