Addressing Restructuring, Including Plan Mergers, Splits and Conversions
Curiously, the report does not recommend that the concept of a partial windup be eliminated completely, despite recommending immediate vesting under all circumstances, expanded grow-in for all involuntary terminations, and the elimination of surplus distributions and annuity purchases on partial windups.
The proposal to eliminate surplus distributions and annuity purchases would improve benefit security for continuing plan members. However, the proposal to treat termination benefits differently between those provided to voluntary and involuntary terminations, and to those provided to SEPP and MEPP/JSPP members, appears open to questions of equitability, and might create additional complexity for plan sponsors.
Plans at Risk
The report recommends that the Superintendent should “develop methods to assess the status” of pension plan sponsors to determine “whether that status may put plans at risk.” The report goes on to recommend that the Superintendent should have the power to require additional valuations and to approve alternate funding arrangements for “plans at risk.” It also recommends that the maximum guaranteed Pension Benefits Guarantee Fund (PBGF) pension should increase to $2,500 from $1,000 per month; PBGF premiums should take into account more “risk-generating factors”; benefit improvements made within five years of plan failure should not be guaranteed by the PBGF; the PBGF should be operated on a self-funded basis; and alternatives to the PBGF should be considered and reviewed.
While efforts to improve risk management are a worthy objective, it is questionable as to whether pension regulators have the resources, or are in the appropriate position to evaluate the financial status of pension plan sponsors. Regulatory powers to address funding concerns should be limited and clearly detailed in legislation so that a sponsor knows what to expect. Otherwise, unexpected accelerated funding obligations could expose many pension plan sponsors to greater risk of insolvency, which, paradoxically, would increase the risk that promised pension benefits will not be fully funded.
Regulation and Governance
The report makes several positive recommendations for pension plan regulation. If adopted, they could lead to greater clarity in pension regulation and fewer disputes in the courts. However, the recommendations might also necessitate a significant increase in regulatory staffing and budgetary requirements.
The report recommends that a “pension champion” within the Ministry of Finance should be created with a mandate to consult with stakeholders, promote innovation within the pension system, and develop pension policy standards for good governance. It also recommends that the government should conduct a review of the PBA every eight years. In general direction, the report recommends greater plan member involvement in the oversight of pension plans, stopping just short of mandating joint governance.
While regular reviews of the PBA are desirable, the implementation of the recommendations relating to pension plan governance will significantly increase the cost and complexity of administering pension plans.
Plan Design and Innovation
The report makes three key recommendations relating to pension plan design and innovation:
•A single employer should be able to establish a “target benefit” pension plan, to be funded on a going concern basis and governed by a joint board of trustees with a union or association representing members;
•Pension policy and legislation should encourage large-scale, multi-sponsor plans and “encourage cooperation” among smaller plans; and
•Expansion of the Canada Pension Plan or the creation of a comparable provincial pension plan should be explored
These suggestions are a step in the right direction, insofar as the proposed changes provide increased flexibility for new pension plan designs, risk-sharing arrangements and asset pooling. But they do not go far enough. Pension regulation should focus on three primary goals: promoting increased pension plan coverage, clarifying the benefit promise made by a pension plan, and ensuring that the promised benefits are delivered. Unfortunately, the OECP report addresses only the second and third goals. Given that the long-term security of millions of employees is at stake, it is not enough to settle for the old adage that “two out of three ain’t bad.” Ontario’s workers deserve a perfect score.
Steve Bonnar has been with Towers Perrin for over 25 years and is a Principal in the Toronto office.