British Columbia’s pension regulator is cracking down on vague termination expense assumptions over fears unrealistic calculations have caused some plans to overstate their solvency ratios.  

“We’re becoming a little more rigorous in our expectations,” says Michael Peters, the acting superintendent of pensions at the Financial Institutions Commission of British Columbia in Vancouver.

Guidance issued last month by the commission says solvency valuation reports must include a reasonable estimate of how long it will take a pension plan to complete its windup after the termination date, accounting for delays in the preparation and approval of a report, and the payment of benefits to plan members. 

Read: B.C. takes first step to resolve pension solvency funding challenge

And unless the plan’s text states the sponsor will take care of the expenses associated with any delay, the guidance instructs actuaries to make an explicit assumption about how much the whole process will cost, including fees for legal and other professional services, annuity purchases and administration of the windup.

Peters says standard actuarial practice, which allows the actuary to assume a plan will terminate on the day of valuation, can contribute to the calculation of unrealistic termination expenses. When a defined benefit plan windup actually occurs, a termination report must be filed within 150 days, he notes.

“You’re looking at five or six months as the default position,” says Peters.  

Factors such as the size and complexity of the plan, the involvement of third parties and the ability to reach members will help determine the length and costs of the windup period for individual plans, says Peters, noting that in extreme cases, such as the Nortel Networks Corp. saga, the process can drag on for years.

Read: Nortel pensioners face decision on payment options

“We’re not saying you have to assume the worst-case scenario, but it should account for some reasonable period for windup,” he says.

Peters says low-ball estimates of termination costs effectively understate the plan’s potential liabilities, resulting in an overstatement of its solvency ratio and setting the stage for an even worse situation should the sponsor go under.  

“If there are no sources of additional funding and the termination costs more than expected, then benefits are going to be reduced ever further, which will cause distress among members,” he says.

According to Peters, the commission’s guidance followed a recent case in which one sponsor withdrew from a multi-employer plan and the actual cost of the partial termination exceeded the assumption contained in the last valuation.

“That gave us some cause for concern,” says Peters.

Read: 2016 Top 100 Pension Funds Report: Solvency reform on the agenda

In addition, he says when the commission has asked for revised termination expense assumptions from plans in the past, the estimates have increased by “an order of magnitude.”

Sean Maxwell, a partner in the pensions and benefits practice group at Blake Cassels & Graydon LLP, says termination expense calculations often appear in valuation reports as a flat value without much detail.  

“Some numbers you see carried over from valuation to valuation,” says Maxwell. “I suspect there’s some concern that the numbers have been inserted in without much assessment in each case and I think what they’re attempting to achieve here is a bit more granularity, or even some contingency built in, just in case there are bumps along the road.”

Read: Time for B.C., Alberta pension administrators to prepare for new triennial assessments

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

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