There’s a “new world order in pension funding” and members of the International Foundation of Employee Benefit Plans (IFEBP) learned what that means to them at the IFEBP Canadian legal legislative update in Ottawa on May 12 to May 13.
D. Cameron Hunter, an actuary and principal with Eckler in Toronto, gave an overview of this brave new world as he addressed solvency, jurisdictional issues, assumptions and methods, investments and intergenerational equity.
New trustee responsibilities
For the gathered pension trustees, he outlined a substantive change that came into effect this year. As he explained, under new actuarial professional standards, the level of margin included in the actuarial valuation is now the responsibility of the trustees.
“The actuary sets best estimates and assumptions for the financial management of the plan, and it’s up to the trustees to tell the actuaries what level of margin to include,” Hunter explained. “In the past, it’s the actuaries that take responsibility but that’s no longer the case, thus it’s vitally important that you understand the implications of establishing the margins.”
Hunter also addressed the issue of solvency funding, which he said was the wrong measure for multi-employer funding as well as some public-sector funding.
Solvency funding
“The intention of solvency funding is to protect members benefits in the event of plan termination,” he said, but added that this risk is remote. “You’re taking the remote potential of a plan termination and making it a certainty.”
He noted that some provinces have “seen the light” on solvency funding, including B.C., Alberta and Nova Scotia, which have temporarily removed requirements, and said Bill 120 in Ontario is expected to remove it permanently, though he expressed concern that a government change in Ontario’s provincial election in October might affect that bill.
“I’m hopeful we’ll see some legislation that will remove solvency funding permanently,” Hunter said. “It currently applies to all other jurisdictions across the country.
Multi-jurisdictional agreement
He noted that the Canadian Association of Pension Supervisory Authorities has released a multi-jurisdictional agreement, which Alberta, Ontario and Quebec have all indicated they will sign. The agreement clarifies what’s required for plans that have members in more than one province, and he noted that the current situation allows the Quebec regulator to split the solvency plan, which could lead to disadvantages for other provinces.
“The agreement is new and untested,” he said. “I would guess that if Quebec did force a split, the trustees would have no choice but to seek guidance from the courts and (the issue) could end up in the Supreme Court since it crosses provincial borders.”
Hunter also told trustees that the ability to reduce benefits ranges from “not-at-all in some provinces to virtually complete latitude in others.” He said trustees need to be aware of these issues and any limits of changing benefits when financially managing plans.
While he noted that many trustees like the security of bonds, bond returns simply can’t provide the return necessary to support a reasonable level of benefits.
“Trustees need to look at risk-seeking investments to make up the difference,” he said. “You’ll need to incorporate an appropriate level of margins. Trustees should have a dialogue with their actuaries to make sure they understand.”