Scott Perkin, President of the Association of Canadian Pension Management, shares his views on the pension panel report.
What is the reaction of the Association of Canadian Pension Management (ACPM) to the reports from the Ontario Expert Commission on Pensions (OECP) and the Joint Expert Panel on Pension Standards (JEPPS)?
Both reports are very comprehensive and have clearly fulfilled their mandates. The Ontario mandate was to focus on defined benefit (DB) plans, and the Alberta/B.C. focus was both DB and defined contribution (DC) plans, but not the public sector.
The panels are to be commended for the work they did. They accomplished what they set out to accomplish: to look at their pension systems, to figure out what’s wrong and what might be done, and to present a balanced approach to solving these problems. Both reports covered the issues they were asked to cover and really left no stone unturned.
Are there any similarities between the reports?
Both are proposing an overhaul of their respective regulatory structures. The JEPPS is recommending a joint regulator and a joint tribunal, and the creation of a pension advocate and a joint policy advisory council—similar to the OECP pension champion and pension community advisory council.
Both reports, especially the JEPPS, are talking about moving to more principles-based regulation, as opposed to the detailed rules that we’ve had in the past. As an example, there are no prescriptive rules around governance at present. Instead, we rely upon the CAPSA Guidelines and best practices to help guide the industry.
The DB funding issue is pivotal in both reports. The OECP is looking to tighten up the funding rules for private sector plans. This is also true in the JEPPS report, but not to the same extent.
What about differences?
A key difference between the OECP and JEPPS reports also has to do with DB funding. While both reports call for a funding cushion, and restrictions on contribution holidays and surplus withdrawals, the JEPPS report proposes something called a ‘pension security fund’ (PSF) and ‘ring-fencing.’ The PSF could encourage better DB funding by allowing plan sponsors access to excess funding that is not ultimately required to fund promised benefits, while ‘ring-fencing’ would allow sponsors to manage legacy issues related to surplus with more certainty. These measures, while missing from the OECP report, could also assist significantly toward resolving similar funding issues in Ontario.
What about coverage?
Coverage was also a very big issue and there were differences between the two reports. The JEPPS is proposing the Alberta/B.C. (ABC) plan—a provincial DC plan with automatic enrollment and an opt-out for employers and employees. Evidence from other countries suggests that auto-enrollment (with an opt-out) tends to achieve higher rates of coverage than plans simply having an opt-in. This could help deal with the coverage issue for small to medium-size employers. The OECP report, on the other hand, simply suggests that the Ontario government investigate the possibility of expanding the Canada Pension Plan or creating a similar provincial plan.
The OECP report does, however, offer other ways to address the coverage issue such as the promotion of target benefit plans, where the benefit can be adjusted based on the level of contributions and investment returns. It’s not a true DB; it’s targeting the benefit but not promising what you’ll get at retirement. It may offer a more engaging way for employees to plan for retirement. DB may not work for every employer because of expense and governance issues, while the DC model may not achieve the expectations of employees. The target benefit forces the employee, and perhaps the employer, to continually test where they are at—to increase contributions, change the target benefit, et cetera.
How does the Nova Scotia Pension Review Panel (NSPRP) report compare to the OECP and the JEPPS reports?
The one thing we noticed in particular was where Nova Scotia may be headed on the funding of DB plans. The NSPRP is proposing a new Accrued Benefit funding model to replace the current going concern and solvency measures. As proposed, the rules would be the same for all plans, except for public sector plans that were not part of the panel’s mandated review. As we understand it, the new model is intended to produce less funding volatility; however, no one really knows yet what this new model might produce compared to the current models.
Is harmonization any closer now with N.S. on board?
Not necessarily. Despite calls for greater harmonization from all three reports, the new funding model that the NSPRP is proposing may produce further complexity for employers that have DB plans for employees across the country. That said, the NSPRP does propose a form of ‘passport system’ to allow for the efficient administration of pension plans that have members in N.S. but that are registered in another jurisdiction.
We may ultimately see more harmonization within Western Canada, Eastern Canada and perhaps between Ontario and Quebec. But harmonization right across the country is still a big question mark.
Given the timing of these reviews, we had hoped that these three reports would have produced even more similar proposals. We’re not sure whether we’re heading toward more uniformity or less. That’s definitely a concern for ACPM, and we’ll continue to push for greater uniformity as we respond to each of these three reports. Ideally we would like to see more uniformity on major issues such as funding, governance, investments and coverage. Those issues are identical right across the country; there’s no compelling reason for provinces to respond to these issues in a different fashion.
Do you have any concerns about the reports?
The OECP is proposing a five-year continuation of the Pension Benefits Guarantee Fund (PBGF), pending a proper review, while increasing the benefit level in the interim by 150%. We understand that the benefit hasn’t kept pace with inflation; however, the review should have preceded such a large increase in benefit levels. Ironically, the extra funding for these higher benefit levels will have to come from higher assessments, one more cost for those pension plans covered by the PBGF that are currently facing funding challenges.
Do you think the panels’ recommendations will be adopted?
I’m an optimist; I hope that each report will be acted upon in its entirety and that, prioritizing aside, the governments won’t start cherry-picking certain issues, so that all stakeholders can support legislative reforms as we move forward.
What is the likely time frame?
The challenge will be to convince the various governments that these reports are important and should be acted on in the near term, notwithstanding other current economic challenges. It would be a shame if governments missed this opportunity to enhance pension regulation for the benefit of all stakeholders.
Alyssa Hodder is Editor of Benefits Canada and Brooke Smith is Associate Editor of Benefits Canada.
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the March 2009 edition of BENEFITS CANADA magazine.