1. The plan’s solvency position must still be calculated and disclosed(although it has no impact on funding).
2. Any going-concern unfunded liabilities must be amortized over 12 years.
3. Benefits may be improved and funded over 12 years, unless the plan’s transfer ratio is less than 80% or the plan’s goingconcern funded ratio is less than 90%, in which case the funded liability must be amortized over eight years.
4. The trustees must inform all parties, including plan members, the union and contributing employers, of the potential impact of registering the plan as a SOMEPP.
The biggest remaining hurdle for Ontario MEPPs is that the new rules for SOMEPPs are temporary and will remain in effect only for actuarial valuations with effective dates from Sept. 1, 2007 to Aug. 31, 2010. So while some plans are jumping at the opportunity to reinstate benefits that were cut to address a solvency deficiency, others are reluctant to restore benefits at the risk of having to cut them again when the window closes.
Origins of Solvency Funding
Solvency funding was first introduced with the overhaul of provincial pension legislation in the late 1980s as a means of safeguarding members’ pensions in the event of plan termination. For non-MEPPs, solvency funding required an increase in contributions to eliminate any solvency deficiency over five years. For MEPPs, the legislation simply stated that the actuary had to attest to the sufficiency of the contributions without reference to going-concern or solvency. The law was similarly silent on the amortization period for MEPPs.
When they were first implemented, the solvency requirements did not seem particularly onerous, and potential ambiguities around the funding requirements for MEPPs were scarcely noticed. With generally strong pension fund investment returns and interest rates higher than the discount rates used to value going-concern liabilities, solvency deficiencies were virtually unheard of at the time. But when interest rates fell, market volatility increased and generous early retirement benefits became the norm, solvency funding became recognized as the “sleeping giant” of the 1990s.
Challenging the Legislation
Solvency funding causes problems when it is applied to MEPPs for several reasons. First of all, the primary purpose of solvency funding is to safeguard the members against plan termination. However, since MEPPs involve more than one employer, the likelihood of plan termination is greatly reduced. Furthermore, contributions to most MEPPs are collectively bargained so, in most cases, the only way to address solvency deficiencies during the period of the collective agreement is to reduce benefits.
In spite of these issues, the initial interpretation of the legislation by the Financial Services Commission of Ontario(FSCO)was that the same funding rules applied to MEPPs as to non-MEPPs, meaning that solvency deficiencies had to be paid off within five years. If contributions were locked in under a collective agreement, the trustees were left with little choice but to cut benefits.
The Labourers’ Pension Fund of Central and Eastern Canada was the first plan to challenge FSCO’s interpretation. The Labourers’ plan filed an actuarial valuation as of Dec. 31, 1996, which made no specific provisions for solvency funding. The trustees of the plan took the position that solvency funding for MEPPs was not required by the applicable regulations. In May 1999, the Superintendent of Financial Services issued a Notice of Proposal against the Labourers’ board, which proposed to impose solvency funding obligations on the plan. The trustees opposed the notice and sought a hearing before the Financial Services Tribunal; however, the matter was eventually resolved without a hearing.
In the words of Joe Mancinelli, chair of the board of trustees of the Labourers’ Pension Fund of Central and Eastern Canada, “If we had been required to solvency fund, significant benefit reductions would have almost certainly been required…benefit reductions which, quite frankly, would have been unnecessary and inappropriate for a continuing and vibrant plan such as ours.”
As it turned out, the Labourers’ weren’t the only ones to benefit from this challenge. In an effort to resolve the issue of MEPPs and solvency funding, FSCO began easing up on amortization periods, allowing MEPPs to pay off solvency deficiencies over periods of up to 20 years based on the average period of remaining active membership in the plan. But the battle wasn’t over yet—in July 2000, the Superintendent issued a letter to all MEPPs to “clarify” FSCO’s position, asserting that solvency funding did apply to MEPPs and that this position had been held consistently over time. However, the regulations were not similarly clarified.
Struggling With Solvency Solutions
Then came the market crash of 2001/02 and the related drop in interest rates. With no ability to increase contributions, even with longer amortization periods, many MEPPs still found themselves facing massive solvency deficiencies.
Going-concern Funding vs. Solvency Funding Going-concern funding looks at the plan’s funded status on the basis that the plan will continue to operate indefinitely. Solvency funding assumes that the plan suddenly stops operating as of the valuation date. It is intended to test whether the plan has sufficient assets to provide an immediate payout of all benefits that have been earned up to that date. |
Looking for a solution with the least direct impact on plan members, some boards first considered implementing a requirement for trustee consent for early retirement benefits. This tactic has no material effect on plan members but results in lower solvency liabilities. For many plans, however, this change alone was not enough to resolve the solvency issue.
The next step was to look at ancillary benefits. Some MEPPs provide more generous disability, termination and pre-retirement death benefit provisions than those required by the law. Reducing these benefits to the minimum legal requirements offered additional relief for some plans.
Early retirement subsidies, which have a large impact on solvency liabilities, were typically the next thing to go. In some cases, this meant bumping up the normal retirement age. In other cases, it meant implementing a full actuarial reduction for early retirement. Either way, the unintentional side effect was a flood of early retirements as members raced to take advantage of more generous early retirement features before the rules changed. In sectors already facing severe labour shortages, these “early retirement windows” were damaging and counterproductive.
Finally, in a last ditch effort to fund their solvency deficiencies, some plans started cutting pensions already earned by both active and retired members. More often than not, the plans making these cuts were very healthy on a going-concern basis.
One of these plans was the IUOE Local 793 Pension Plan for Operating Engineers in Ontario. According to Mike Gallagher, business manager of Local 793 and a trustee of the plan, “the trustees had to make deep and far-reaching benefit reductions that were unnecessary from a going-concern perspective.” Gallagher adds that the prospect of impending benefit reductions caused unnecessary fear and stress among members. It also caused a spike in early retirements, which resulted in many skilled workers leaving the workforce earlier than planned.
Other plans decided to follow the Labourers’ lead and make no provision for solvency funding. For example, the trustees for the International Brotherhood of Electrical Workers Local 353 pension plan took the issue to a membership vote. The results came back 72% in favour of not funding the solvency shortfall.
Lobbying for Change
Finally, the Multi-Employer Benefit Plan Council of Canada(MEBCO), a not-forprofit lobby group representing the interests of multi-employer plans, approached the Ontario government to explore the possibility of further clarifying the law.
Here are some of the key issues that MEBCO has raised in its submissions.
MEPP, SMEPP or SOMEPP? Under Ontario law, a pension plan with more than one employer contributing to the plan is considered a MEPP. However, most MEPPs are actually “specified multiemployer pension plans”(SMEPPs)—plans in which members work for one of numerous employers and frequently change employment among these employers. To be registered as a SMEPP, a plan must satisfy a number of criteria. 1. No more than 95% of active members can be employed by a single employer.
2. There must be at least 15 participating employers or at least 10% of active
members employed by more than one employer.
3. Employers must participate in the plan pursuant to a collective bargaining
agreement.
4. All or substantially all of the employers must not be tax-exempt.
5. The plan must be administered by a board of trustees that is not controlled
by employer representatives.
6. Employer contributions must be fixed amounts set out in collective agreements.
7. The administrator must have the power to determine the benefits provided
under the plan. To qualify as a “specified Ontario multi-employer pension plan”(SOMEP), a SMEPP must also satisfy the following additional criteria. 1. It cannot prohibit reductions in benefits.
2. It must elect to be classified as a SOMEPP.
A pension plan may make the election to become a SOMEPP at any time between Sept. 1, 2007 and Aug. 31, 2010. The decision may be rescinded, but a plan may only elect to be a SOMEPP once. |
• In the 40 years that Ontario has regulated pensions, only five defined benefit(DB) MEPPs have terminated. Of these five plans, only three were “specified multi-employer pension plans”(SMEPPs). Given this track record, it seems that onerous solvency funding requirements exist to address a relatively small risk of plan termination.
• Because members typically bear the brunt of funding shortfalls through benefit reductions, stringent solvency funding requirements have the effect of making benefit levels highly volatile. If the solvency position improves or deteriorates, additional adjustments are required to satisfy the funding rules. Essentially, the funding rules impose unnecessary constraints on the trustees trying to manage the plan and make it difficult for members to plan for retirement.
• The only option for trustees trying to minimize benefit volatility is to reduce benefits to a level low enough to avoid solvency deficiencies. While this strategy may marginally increase benefit security, the adequacy of the benefit is substantially reduced. Guaranteeing an inadequate pension provides little security for plan members.
Hope for the Future
While the Ontario government seems to be acknowledging MEBCO’s viewpoint by implementing the new funding regulations for SOMEPPs, these changes are only temporary. Also, although the regulations make it clear that solvency funding does apply if a MEPP doesn’t qualify or doesn’t elect to be registered as a SOMEPP, that’s where the clarity ends. The new regulations do not specifically state a timeline for these plans to eliminate going-concern unfunded liabilities or solvency deficiencies. Differences of opinion have already started to emerge over the interpretation of these rules.
The final verdict will depend, in part, on the findings of the Ontario Expert Commission on Pensions(OECP). The OECP’s mandate is to examine the legislation that governs the funding of DB pension plans in Ontario, the rules relating to pension deficits and surpluses, and other important issues relating to Ontario’s pension system. Because MEBCO’s efforts predate the establishment of the OECP, the Ministry of Finance has taken the position that the new funding regulations should remain in effect only until the OECP completes its report.
We hope that the OECP will confirm that the elimination of solvency funding requirements for SOMEPPs is reasonable and will recommend that it be implemented permanently. We also hope that other jurisdictions will follow Ontario’s lead and remove solvency funding for MEPPs from their provincial pension regulations, helping to ensure the sustainability, viability and sufficiency of these plans over the long term.
Cameron Hunter is an actuary and principal at Eckler Ltd.; Tom Levy is senior vice-president and chief actuary at The Segal Company, Ltd.; Michael Mazzuca is a partner at Koskie Minsky LLP; and H. Clare Pitcher is principal and consulting actuary at ACS/Buck Consultants. chunter@eckler.ca; tlevy@segalco.com; mmazzuca@kmlaw.ca; clare.pitcher@buckconsultants.com
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