…cont’d

Some sponsors may be considering whether there is merit in accelerating the filing of the SRR. In many cases, the answer is no, as the SRR would generally reveal higher contributions and the requirement to file annual valuations sooner. For such plans, if the sponsor wants to start funding the expected deficit by remitting additional contributions in excess of those normally permitted by the prior actuarial report, this can be achieved by filing an interim actuarial opinion with the Canada Revenue Agency to support the lower windup funded position of the plan.

However, for some plans, accelerated filing of the SRR could result in a substantial reduction in the required contributions for the first year following the effective date of the SRR, particularly if there are significant prior solvency amortization schedules which could be reamortized under option 2.

If the sponsor successfully obtains consent regarding a ten-year amortization period for new solvency deficits, there is another issue which arises, namely whether solvency assets and liabilities should be smoothed. Asset smoothing methods tend, in the period immediately following a large decline in asset value, to generate a smoothed value of assets (SVA) which is much larger than market value of assets (MVA).

For example, some smoothing methods recognize 20% of the investment experience in the first year and an additional 20% in each of the next four years. Thus, using a SVA and smoothed liability discount rates is expected to generate a smaller solvency deficit than using MVA and market discount rates because up to 80% of the 2008 asset experience is deferred, minimizing the amount of solvency relief available. Further, in subsequent valuations, any solvency losses which result from the extension of the smoothing method (as subsequent years will bring 20% of the 2008 investment losses into the SVA) will be amortized over the five years when they could have originally been amortized over ten.

The foregoing issues demonstrate the need for sponsors to fully consider their solvency funding relief options. In order to understand the potential impact of the various elections and issues, it may be prudent to forecast required pension contributions, with a particular focus as to the impact of future favourable or unfavourable experience. Solvency funding relief is a blessing for many pension plan sponsors, but, as with all things pension, careful consideration should be applied to achieve the maximum value for the organization.

Philip Morse is a Principal in Towers Perrin’s Toronto office.

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