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Mercer Human Resource Consulting's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:

15 September 2005

Ms. Diane Lafleur
Financial Sector Policy Branch
Department of Finance
L'Esplanade Laurier
20th Floor, East Tower
140 O'Connor Street
Ottawa, ON K1A 0G5


Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the Pension Benefits Standards Act, 1985

Dear Ms. Lafleur:

We are pleased to submit comments on the consultation paper "Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the Pension Benefits Standards Act, 1985" published in May, 2005 (the "Paper").

We agree that the legislative standards governing the funding of defined benefit pension plans should be reviewed. The Paper raises important issues for debate.

The subject of defined benefit pension plan funding is complex. Many factors need to be taken into account in creating an optimal legislative regime and discussion is needed for all Canadian jurisdictions. We enclose two papers. In the first "Funding Defined Benefit Pension Plan: A Better Way" we discuss the measures that, when working together, would improve the security of benefits without undue burden to the supporting business and plan members. In the second, in response to the specific inquiries set out in the Paper, we provide answers consistent with the views expressed in "Funding Defined Benefit Pension Plan: A Better Way".

We consent to the posting of our submission on the Department of Finance Web site.

Yours truly,

Paul Forestell
Michel St-Germain


15 September 2005

Response to the Consultation Paper
"Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans"


Mercer Human Resource Consulting is pleased to respond to the consultation paper"Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans". Answers to the specific questions in the consultation paper are set out below. We refer you to our paper "Funding of Defined Benefit Pension Plans: A Better Way" which describes our views in detail.

Are there disincentives or obstacles preventing plan sponsors from adequately funding their plans and building up a funding cushion?

Yes. The key problems are lack of sponsor ownership of surplus on plan wind up, and the potential for asset distribution on partial wind up.

Does the dispute settlement mechanism for surplus distribution contained in the PBSA require improvement or clarification?

An expansive interpretation of the expression "former member" in section 1 of the PBSA for purposes of the distribution of surplus has given rise to untenable situations. The PBSA provides that surplus withdrawals are subject to agreements entered into by the employer and the plan members, former members and other prescribed persons (s. 61(3)). For such purposes, "former member" is defined, in s. 1, as including "a person whose membership has been terminated". In some cases, an expansive interpretation of this definition has been used, and resulted in the inclusion, among the group of "former members", of former employees who had terminated employment prior to vesting and received a refund of their contributions. Such expanded interpretation of "former member" is inconsistent with the intent of the legislative scheme on surplus distribution. The intended legislative scheme is to grant eligibility to be consulted on an employer's proposal for surplus refund to persons whose interests are directly affected by the employer's claim, that is, persons who are actually accruing, expecting to receive or receiving benefits from the plan at the time of the employer's application. The internal coherence of the scheme dictates that terminated unvested employees towards whom the plan has no further ongoing obligations should be treated the same way as the former members who elected to transfer their entitlements out of the plan pursuant to s. 26 of the PBSA and not have any standing in the consent group. The current uncertainty should be removed by legislative amendment. The status of other groups of members should also be re-examined from the point of view of consistency of the surplus distribution scheme. For example, it may not be relevant to include in the surplus consent group the plan members in respect of whom assets have been transferred to a successor employer following the sale of a business.

Should there be partial plan terminations under the PBSA and if so, should there be a requirement to distribute surplus at the time of the partial wind up?

No, there should be no partial plan termination under the PBSA. The idea of a partial plan termination with surplus distribution, mandated annuity purchases, and accelerated full solvency funding for part of a plan, all while it is otherwise a going concern, is unworkable. It creates the single most significant barrier to the sustainability and adequate funding of defined benefit pension plans today.

If there is a concern that large changes in the plan warrant a new funding valuation, this objective can be achieved without creating a partial wind up. Similarly, full vesting, grow-in benefits or portability for members affected by a significant event can be achieved without creating a partial wind up.

Are there alternative financial vehicles such as letters of credit that could allow for greater funding flexibility? What types of conditions or rules should apply to them to ensure that the risk to benefit security is minimized?

A letter of credit is an appropriate financial vehicle for solvency funding and should be recognized as a pension asset in solvency valuations. This would allow financially healthy employers to select the best way, cash or security, to finance the funding requirement. For example the face amount could be the amount of contributions otherwise required to fund a past service solvency deficiency. The letter of credit should require payment to the plan by the issuing institution if the letter of credit is not renewed.

What is an appropriate amortization period for funding a deficiency and should it differ for financially vulnerable and strong companies?

Ten years is an appropriate amortization period for funding a solvency deficiency. It should not differ for financially vulnerable and strong companies, since neither the pension regulator nor the actuary performing a valuation should be required to assess the financial health of a business. Extension of the amortization period should occur only in extreme circumstances such as when the CCAA or BIA applies.

What types of conditions or rules should apply to an extended amortization period for solvency funding for companies under CCAA or BIA?

The conditions and rules for extending amortization for companies under the CCAA or BIA should suit the particular circumstances of each case. It is not possible to say in advance what every business in these situations should be expected to do or would be able to do, in order to have the longer funding period.

Are there alternatives to address funding issues other than relaxing funding requirements, such as special accounts?

The most significant measure to address funding issues is to restore symmetry for sponsors. This would be most effective if done retroactively to create sponsor entitlement to surplus on wind up and clearly eliminate any possibility of interpretation requiring surplus distribution on past and future partial wind ups. If retroactive change is not forthcoming, then we strongly support forward-looking measures such as special accounts that segregate new contributions from the existing fund and grant sponsor entitlement to the new fund and the elimination of partial wind ups for the future.

Should there be greater disclosure to plan members regarding a plan sponsor's financial condition, funding decisions and contribution holidays? How should this be done?

We support full disclosure about contribution holidays and the funded status of a plan. Clarity and understanding about these matters would be beneficial to all concerned. Disclosure of the funded status of the plan based on the most recent filed information, and about the minimum contribution requirement resulting from the most recently filed valuation or valuation update, should be made annually.

Greater disclosure of a plan sponsor's financial condition to members should not be required. For publicly traded companies it would not be appropriate to give pension plan members more information than is available in the market. Reliance should be placed on the market for this assessment. For privately held employers the information is private and confidential. However, it may be appropriate for the pension regulator to have access to financial information about a privately held employer if circumstances warrant. Careful analysis of the circumstances that should trigger this requirement and the type of information that could be required would be needed.

Should the prescribed solvency ratio for void amendments be 85%, should plans below the threshold be permitted to improve benefits if offsetting funding is provided when the improvement comes into effect, and should recent benefit improvements have lower priority against pension assets?

A void amendment rule that prevents benefit improvements is very intrusive and would not be a significant preventive measure against benefit loss. Solvency status fluctuates significantly, making this approach to prevention a hit and miss proposition. However, if the rule is implemented a low threshold such as 80% (averaged over two or three years) together with regulatory discretion to allow amendments, it might be workable. A better way to address benefit improvements is to create a priority scheme for insolvent plan termination in which recent improvements have less priority than benefits already in place when the amendment was made.

Should full funding on plan termination be required, and how should this be applied to financially vulnerable companies?

It is clear that an employer should not be able to terminate a plan and continue in business without funding benefits in full. A funding period of five years would be appropriate. This should apply to all employers with exceptions made in extreme circumstances such as under the CCAA and BIA.

Would a federal pension guarantee fund be viable, and what design, operation and powers should it have?

A federal pension guarantee fund would not be viable. If it were restricted to plans regulated under the PBSA the pool would be too small and the spreading of risk could not be optimal given the importance of large plans in the group. Even if it could be applicable across Canada a guarantee fund would be expensive and the risk premium system would have to be complex in order to share risk appropriately. Experience with guarantee funds shows that it is extremely difficult to make the system self-supportive, and taxpayers bear this risk.

Mercer Human Resource Consulting Limited
161 Bay Street, PO Box 501
Toronto, Ontario
Canada M5J 2S5
416 868 2000

15 September 2005

Funding Defined Benefit Pension Plans: A Better Way


1. Introduction

2. Overview 

  • Solvency Funding Regime

3. Addressing Asymmetry 

4. Funding Measures 

  • Letter of Credit 
  • Contribution Holidays 
  • Controls on Investment 
  • Solvency Valuations 
  • Full Funding on Wind Up 

5. Safety Net 

  • Guarantee Fund 
  • Priorities on Bankruptcy 
  • Benefit Priorities on Bankruptcy 

6. Going Concern Valuations 

7. Exceptions and Temporary Relief 

8. Conclusion 

1. Introduction

Mercer Human Resource Consulting believes that the defined benefit promise is a desirable and important component of Canada's retirement system and should be a feasible and economically sustainable option for plan sponsors. However, the system is under severe strain. A critically important debate about potential changes to the funding requirements for defined benefit pension plans is underway. We strongly believe that the ideal system is one that allocates risk among sponsors, employees, pensioners and the public purse sensibly and realistically. Mercer is concerned that if a rebalancing of pension plan sponsors' interests and the burden on business is not achieved, Canada's defined benefit pension system will continue to weaken.

2. Overview

Several things are prompting the current debate about the funding of defined benefit pension plans in Canada:

1. Asymmetry: Asymmetry in the system affects the businesses that support defined benefit plans. Deficiencies are the responsibility of the sponsor while surpluses are often shared or dedicated exclusively to plan members. Even though most sponsors can have contribution holidays when there is a funding surplus, the lack of sponsor ownership of surplus on wind up and the potential for asset distribution on partial wind up are significant problems. The general result is that a sponsor who is able to fund above the minimum will not do so. Similarly, sponsors who consider offering new defined benefit pension plans will not do so. Sponsors who are able to, will opt out of offering defined benefit pensions.

2. Low interest rate environment

: The impact of solvency funding standards is beginning to take hold in the current low interest rate environment. Plan sponsors who once experienced only going concern funding or perhaps had long and consistent contribution holidays are now required to contribute large amounts to their pension plans. This places stress on the supporting business and, with asymmetry, it makes no economic sense to make these large contributions if they later become surpluses. The low interest environment was not envisioned by sponsors or legislators and there is a critical need for orderly and sensitive transition measures.

3. Benefit loss

: There are plans with large matured liabilities, insufficient assets for plan termination, and financially challenged employers who are unable to fund the benefits on plan termination. For some, the risk of benefit loss due to plan insolvency has materialized.

It is not realistic to expect the system to eliminate all risk of benefit loss while being financially viable for plan sponsors. The challenge is to find a funding system in which the risk of benefit loss is minimized to the extent that the funding burden is sustainable. Canada needs a sensible and uniform legislative regime in which asymmetry is corrected, and in which large differences in the funding burden do not distort the cost of business from one jurisdiction to another.

Some of the risk factors are not controllable. For example, the business supporting the pension plan might fail. Other risk factors can be addressed to varying degrees. For example, the relationship of a plan's asset mix to its liabilities is a key factor that influences risk.

There is a philosophical point of departure between a going concern funding system and a solvency funding system. A going concern system places more weight on the assumption that the business will continue. The risk of benefit loss on insolvent plan termination is recognized but accepted, so that more risk is allocated to a future generation of plan members. A solvency funding system addresses the risk of benefit loss more rigorously on plan wind up, placing a greater burden on the contributing sponsor.

Solvency Funding Regime

In today's low interest rate environment there is an obvious trend in thinking toward solvency as an appropriate standard for funding. If Canadian policy makers and plan members are concluding that the risk of benefit loss is too high, then the solvency funding system needs to be more robust. However it is simply incorrect to assume that strengthening solvency funding standards will strengthen Canada's defined benefit system. Furthermore, additional solvency funding requirements may not be justifiable for the financially strong sponsors. Those sponsors will be required to divert additional capital to the pension fund with little improvement in benefit security. Without correcting asymmetry, making solvency funding standards more rigorous will only encourage more sponsors to seek a way out. As it is, asymmetry already prevents the creation of new defined benefit plans.

It would be desirable to have more assets in the defined benefit system to allay the risk of insolvent plan termination. In addition to correcting asymmetry, there are three main strategies that would work toward this objective:

1. Require a funding margin, with a funding target above 100% solvency.

2. Allow a contribution holiday after a threshold of funding above 100% solvency is achieved.

3. Require a conservative calculation of the current service cost in the solvency valuation.

However, the funding burden would be far too great if all three strategies, or a combination of a funding margin together with a conservative basis for current service cost, were required.

A well balanced solvency funding regime should have the following attributes:


  • Letter of credit recognized as a plan asset
  • Funding target at 100% solvency
  • Contribution holiday threshold above 100% solvency
  • Conservative solvency current service cost
  • 10 year amortization of solvency deficit that is uniform across Canada

It should be clear in legislation that any decisions made within the minimum funding requirements, and any decisions made to contribute above the minimum on a solvency or going concern basis, are decisions of the contributing sponsor and not of the pension plan administrator. This is important because a fiduciary duty imposed on a contribution decision is tantamount to an obligation to contribute as much as permitted, regardless of the impact of that funding on the supporting business. Employers and other plan administrators should not be placed in this untenable conflict.

3. Addressing Asymmetry

The ideal environment for businesses to support defined benefit pension plans is one in which the obligation to members is to provide the promised benefit, and in which the potential for economic gain and loss in setting aside funds to pay those benefits is balanced. The sponsor who assumes the funding risk would own surplus on wind up. The sponsor's right to take a contribution holiday would be clear. Assets would be available to the sponsor for withdrawal when the funding is excessive. There would be no partial wind ups requiring distributions of actuarial surplus. Ultimately, in such an environment, the contributions made to fund the benefits would equal the actual cost of those benefits. The system would encourage sponsors to fund above minimums and allow employers to justify the cost of providing defined benefits to their employees.

The status quo is substantially different from this ideal. In order to correct the status quo completely, legislation that overrides existing rights would be required and it is not realistic to expect sweeping retroactive change for existing plans.

However, there are several measures that should be implemented to make a significant correction to asymmetry. All or substantially all of the following measures are needed:

  • Partial Wind-up

: The notion of partial wind-up should be eliminated, as has been done in Québec, in all jurisdictions. This is the single most important problem in Canada's system today. Jurisdictions that wish to impose benefit improvement requirements on substantial downsizing events (i.e. "grow-in" and immediate vesting), like Ontario, could continue to do so without the concept of a partial wind up.

  • Letter of credit
  • : Letters of credit or similar guarantees should be a recognized asset for valuation purposes. This would be an important improvement to the system for financially healthy employers who are otherwise reluctant to make contributions that result in trapped capital. This mechanism is urgently needed if asymmetry persists.
  • New plans:
  • Legislation that creates a symmetrical environment for new defined benefit plans should be enacted. For example, a new plan would be able to provide for unfettered sponsor ownership of surplus and contribution holidays and would not be subject to partial plan wind-up.
  • New rules for future contributions:
  • A symmetrical environment could be created prospectively for existing plans. For example, legislation could be created to support freezing benefit accruals in a current plan at the current solvency level, while a new fund is set up to provide for future service accruals, increases in past service benefits and funding of deficits for past service. The sponsor would have clear ownership of surplus in the new fund and benefits would be paid from the first fund until it is depleted.
  • Reserve account:
  • Certain sponsor contributions could be singled out for special treatment with respect to ownership and withdrawal. These assets would be tracked separately in a reserve account, as follows:
  • Any contribution above current service cost would be allocated to the account;
  • The account would earn the fund rate of return for the whole plan;
  • All or a portion of the amount held in the account would be refundable to the sponsor:
  • On an ongoing basis, if all assets exceed the solvency liability plus a margin and also exceed the going concern liability where applicable, the excess (up to the amount held in the account) would be refundable;
  • On a wind-up basis, to the extent that the account is not required to provide benefits and fees related to wind-up, the unused portion would be refundable;
  • A contribution holiday that cannot be justified by reference to the main fund would be charged to the reserve account.
  • Contribution holiday

: Statutory provisions should expressly grant a presumed right to a contribution holiday unless there is a contrary stipulation in the current plan rules. The sponsor's ability to amend the plan to expand contribution holidays should be clearly supported by legislation. Although currently the common law provides this result, and most legislation can be interpreted consistently with this result, express legislative codification of these rules is needed.

  • Business transaction
  • : Legislation should make it clear that actuarial surplus need not be included when assets and liabilities are transferred to a successor employer's pension plans. The role of the legislation should be to ensure that existing levels of benefit security, up to 100% solvency, are protected in these transactions.
  • Ongoing surplus withdrawal
  • : Withdrawal of surplus by the sponsor while the plan is a going concern should be permitted, where surplus is in excess of a solvency margin (for example, 25%), at the option of the sponsor.
  • Surplus ownership on total wind-up
  • : There should be statutory provisions that presume sponsor entitlement to surplus, unless provided otherwise in plan rules and other trust documents. The process for determining ownership as provided in plan rules and other documents should be fair and efficient. Jurisdictions like Québec that require arbitration should allow alternative access to the courts to determine surplus entitlement. If a sponsor can establish ownership there should be no conditions on recovery of those assets by the sponsor, such as Ontario's current member consent rule.

From all points of view, a system in which the asymmetrical treatment of surplus and deficits has been eliminated will offer more incentives for improved funding from plan sponsors, which will greatly benefit plan members.

4. Funding Measures

Several measures affecting solvency funding standards, in combination with correction of asymmetry, would strengthen the current system without undue burden.

Letter of Credit

A letter of credit is an effective form of security, since payment to the pension plan from the issuing institution would be required in the event that the letter of credit is not renewed. A contribution by the sponsor would offset the amount to be paid under the letter of credit. Therefore letters of credit or similar guarantees such as a government guarantee should be a recognized asset for valuation purposes.

This would be an important improvement to the system for financially healthy employers even when symmetry is restored. This increases funding flexibility without reducing security of benefits.

Contribution Holidays

Contribution holidays are an essential element of symmetry and they should not be constrained unless absolutely necessary. However, there are two ways in which contribution holiday rules should be modified. Both measures respect the principle underlying a contribution holiday, that when a plan is adequately funded contributions are not required.

The first modification of the rules addresses the definition of adequate funding for this purpose. Since the solvency status of a plan fluctuates considerably, it is desirable for plans to be funded at some level above 100% solvency. Placing the threshold above which a contribution holiday is permitted at a level above 100% solvency would encourage above-minimum funding by plan sponsors (presuming, of course, that symmetry is restored). Over time, funding margins would be achieved.

The level of the threshold (excess over solvency liability) should reflect the mismatch of assets to liabilities. For example, a plan with more equity exposure than the liabilities justify will have a higher threshold. In considering the definition of the threshold the following should be taken into account:

  • The method to calculate the threshold should be suggested by the Canadian Institute of Actuaries and should take into account that contribution holidays are allowed only after the threshold is reached.
  • The mismatch is difficult to measure, especially considering new types of investment options. Issues of timing for purposes of measuring the asset mix would also have to be addressed.
  • The rules should be flexible enough to allow actuaries and sponsors to demonstrate that the threshold should be lower to reflect the plan's unique circumstances
  • The limit imposed by the Income Tax Act which prevents contributions when a modest surplus exists should be raised to accommodate this build-up of funds.

The second modification of the contribution holiday rules addresses a weakness in the triennial valuation requirement. A shorter valuation cycle is not desirable, but the triennial cycle fails to address the problem of contribution holidays based on two or three year old valuations when the health of the supporting business has deteriorated and the funded status of the plan has also deteriorated. In these cases, the principle underlying the contribution holiday, i.e. adequate funding, is no longer operative.

Although the introduction of a new threshold for contribution holiday assists with this problem, there is still a need for monitoring by the plan sponsor. If there is a deterioration of the solvency position causing a solvency concern before the next filed valuation, contributions should resume. It also makes sense for regulators to have the discretion to require a full valuation when the monitoring shows a solvency concern, and to require annual valuations until the plan emerges from the deficiency.

Solvency concern would be defined for these purposes by regulation. Any requirement for a financial update should be simple, and inexpensive, for sponsors.

Controls on Investment

Asset mix can create significant risk of insolvency. Too much equity exposure for a financially weak sponsor in an underfunded plan with mature liabilities is imprudent. However, investment decisions are particularly complex and difficult to regulate and control. The current system already imposes a fiduciary duty on investment decisions and in theory this should be an effective control. It would make sense for regulators to monitor to a greater degree and to order a change to the asset mix when insolvent plans have clearly imprudent investment exposure.

Despite being able to say that there is a link between the financial health of a sponsor and tolerable investment risk, there is no universal way to define imprudent investment for regulatory purposes, since each situation is unique. Accordingly, for purposes of a regulator's monitoring, discretion to take into account all the circumstances is necessary. At least at one end of the spectrum, the sponsor and the regulator can be assisted in determining that a higher degree of asset and liability mismatch is acceptable when a letter of credit or similar guarantee is in place.

Solvency Valuations

A solvency valuation should be a pure or nearly pure wind up valuation that reflects the benefits that would actually be paid on plan wind up. There should be a ten year amortization period for funding solvency deficits. A longer period will help to address the volatility of contributions determined on a solvency basis.

To fund sensibly on a solvency basis, the actuary should determine the "solvency current service cost". This is the amount required if the initial solvency liability (together with the solvency current service cost and accruing interest at the valuation interest rate i.e. the rate of interest used to calculate solvency liabilities) is to cover

  • the expected benefit payments, and
  • the solvency liability at the end of the projection period.

The projection period should be set out in regulations – preferably 3 to 5 years.

This calculation takes no advance credit for the equity risk premium that the pension fund might reasonably be expected to earn. As such, particularly in a low interest rate environment, the solvency current service cost provides a conservative estimate of the contribution required to support a plan with 50% to 70% of its assets invested in equities. To the extent that the equity risk premium will be realized, this will generate future surplus. Regulators should obtain guidance from the CIA on the technical aspects of this calculation, including its impact on the development of a funding margin.

Full Funding on Wind Up

It is clear that an employer should not be able to terminate a plan and continue in business without funding benefits in full. A funding period of five years would be appropriate.

For some plans a full wind up is problematic because of large pensioners' liabilities. This problem is further compounded if the pensions are indexed. The Canadian annuity market cannot absorb large purchases of annuities. Furthermore, when pensions are indexed the annuity prices are far too high, or the insurance product is simply not available. Legislation is needed to allow the payment of commuted values in place of the mandatory purchase of annuities, or to consider the continuation of an immunized fund to pay the benefits.

This problem currently exists for partial wind ups as well as full wind ups in many jurisdictions. If the partial wind up is not eliminated, it should be made abundantly clear that annuity purchase is not required.

5. Safety Net

Guarantee Fund

It is tempting to think that if immediate and constant full funding of a defined benefit pension plan is too expensive for sponsors, then the risk of pension plan (and business) failure should be insured in a pooled arrangement. However, a guarantee fund would have significant problems:

  • Risk of wind-up is very heterogeneous, with each business and plan having unique characteristics. Risk premiums could not be equitable unless a complex risk-based approach was developed. It would be very difficult to establish an equitable sharing of risk between sponsors.
  • It would be too expensive for the sponsors to insure all benefit loss through a guarantee fund. Even with restricted benefit loss coverage, substantial claims could drain the fund. The idea of a government back-up for full or nearly full coverage would be tantamount to creating a new tier of public pension plan.

Experience with guarantee funds shows that it is extremely difficult to make the system self-supportive, and taxpayers bear this risk. In the United States the system is under severe pressure. In the United Kingdom, where full coverage is intended, the proposed premiums for sponsors below investment grade are astronomical.

Priorities on Bankruptcy

Insolvent pension plan terminations will occur. Currently, payments that were due to be made before the employer's insolvency may or may not have priority over other creditors' claims under deemed trust rules. The additional money needed to fully fund the benefits may be an ordinary debt, ranking below secured debt.

It would be helpful to make it abundantly clear that contributions already overdue have priority. However, there may not be much that can or should be done to give the remaining pension deficit greater priority. Any material improvement of the plan members' position in relation to secured creditors will affect the employer's ability to borrow, accelerating a business failure or, as the case may be, preventing financial reorganization. Ultimately if such a measure were implemented the cost of doing business in Canada may be too great.

Benefit Priorities on Bankruptcy

On insolvent plan termination it can become clear in hindsight that it would have been better if recent benefit improvements had not been made. The improvements may have worsened a solvency deficiency when they were made, increasing contribution requirements that may in turn have worsened the sponsor's financial position. It might also seem unfair to pay these benefits at the same level of reduction that applies to previously accrued benefits. It is tempting for a regulator to want to control benefit improvements while a plan is a going concern, but this type of measure is a blunt tool and too intrusive.

Placing controls on benefit improvements in the context of an actual wind up with insufficient funds would be more effective. At that time, benefit improvements made prior to the wind up could be given lower priority than long-standing benefits.

Benefits that were created in the few years before wind up could be eliminated or more drastically reduced than benefits that existed before the amendment. A reasonable method for determining which benefits are reduced more drastically could be created, for example following the model already in place in Québec. This is a small measure in the overall picture, but it could be meaningful in certain cases.

6. Going Concern Valuations

Where solvency valuations are required, going concern valuations should be optional for the plan sponsor.

The objectives of a going concern valuation are to establish stable and foreseeable contributions and the proper allocation of costs over time and between generations. Therefore a going concern valuation should not be required to include a funding margin. There should be no regulatory intervention in the selection of assumptions, which should be based solely on CIA practice standards.

7. Exceptions and Temporary Relief

Now or in the future, many sponsors may want relief from the impact of solvency funding requirements. For the financially healthy employers the introduction of letter of credit financing is an appropriate response. For government guaranteed plans that have no solvency risk, suitable exemptions can be created by regulation. For distress situations such as bankruptcy and court-protected reorganization, it is not feasible to consider in advance what type of relief would be warranted, if any. The appropriate response in those cases is to amend the regulations if needed on a case by case basis (or to provide the regulator with the power to grant relief through longer amortization periods or similar pre-defined measures), and to rely on mechanisms under insolvency legislation to balance the competing interests. In that context, the pension regulator should have a key role in negotiations.

8. Conclusion

The regulator is facing a difficult choice: What should be the minimum funding target? There will be plans for which the target will be too low, and other plans for which the target will be too high. Any change in the minimum funding standards for defined benefit pension plans requires careful balancing of related factors. What is clear is that asymmetry must be corrected, letters of credit should be an acceptable plan asset, and a move to require greater funding should not be drastic but rather should be balanced and sensitive to transition needs.

Mercer Human Resource Consulting Limited
161 Bay Street, PO Box 501
Toronto, Ontario
Canada M5J 2S5
416 868 2000