A new component of the 2010 survey included questions designed to gauge the level of support for some of the new ideas being tabled in Ontario and other Canadian jurisdictions as they pertain to the reduction of costs and volatility of DB plans. These responses showed that:
• 56% of respondents supported the use of letters of credit to secure portions of their solvency liabilities—allowing for increased levels of security without necessarily permanently pledging contributions which may evolve into surplus should the economic situation improve dramatically over the coming years;
• 58% supported new concepts such as pension security funds and ring-fencing to better manage the legacy surplus issues faced by current plan sponsors—ensuring that additional contributions today can be more readily accessed by employers if they are not needed in future to secure plan benefits;
• 55% supported the use of average solvency funded ratios in determining contribution requirements (a key component of proposed federal reforms)—effectively reducing the year-over-year volatility in pension plan contributions;
• 49% supported the use of fresh-start amortizations for solvency deficits—simplifying the funding rules significantly and reducing the year-over-year volatility in pension plan contributions, which, in many cases, will allow subsequent solvency gains to more quickly reduce the level of amortization payments;
• 47% supported the concept of allowing smaller pension plans to use large independent plans to manage their assets—allowing these plans to achieve economies of scale not otherwise available to them; and
• 54% supported the notion of enhancing the priority of pension contributions/payments on the bankruptcy of the employer—potentially providing greater financial security for plan benefits following employer insolvency, but may adversely affect a companies’ ability to raise capital in a time of need.
Of the above six points, the first four relate to the “trapped capital” risk that troubles many of today’s plan sponsors. In the private sector shareholder monies may get unnecessarily trapped inside the pension fund for many years, while in the public sector taxpayer and member contributions may get trapped and end up causing intergenerational equity issues.
While no single concept was viewed by a vast majority of respondents as a silver bullet to solve the pension funding crisis, there was a broad level of support for each of these potential solutions.
Defined benefit plans are an important pillar in the financial security of many beneficiaries. To the degree that legislators look to increase, or at least curtail decreases in DB plan coverage in Canada, the survey provides support that implementation of several of these ideas would be positively received by plan sponsors. To the extent that legislative change can address some of the financial issues facing plan sponsors and better level the regulatory playing field, perhaps more of them will retain their DB plans for the next generation of employees, maintaining this valuable form of deferred compensation and financial security for employees.
Read more about the survey here.
Philip Morse is a senior actuary in Towers Watson’s Toronto office.
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