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Conference for Advanced Life Underwritting's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:
August 23, 2005
Financial Sector Policy Branch
Department of Finance
20th Floor, East Tower
140 O'Connor Street
Ottawa, ON K1A 0G5
Dear Ms. Lafleur:
Re: Comments on May 2005 Consultation Paper on "Strengthening the Legislative and Regulatory Framework for Defined Benefit Plans Registered under the Pension Benefits Standards Act, 1985"
The Conference for Advanced Life Underwriting (CALU), a conference of Advocis„¢, The Financial Advisors Association of Canada, appreciates the opportunity to comment on the Consultation Paper, dated May 2005, on funding of defined benefit registered pension plans. Advocis is the largest voluntary professional membership association of financial advisors in Canada, representing more than 15,000 advisors in 50 chapters across Canada. Advocis members provide comprehensive financial and retirement planning, finance and wealth management, estate and tax planning, risk management and employee benefits planning products and advice to over 12 million Canadians.
CALU was formed in 1991 with the mandate to address advanced applications of life insurance and financial services. CALU has established a reputation for expertise in the area of employee benefits and pensions and has been active in a number of consultations with government officials.
The majority of the employee pension clients of CALU and Advocis members are small and medium sized businesses and the following comments are provided with the needs of these plan sponsors in mind.
Small and medium sized employers tend not to have the same ability as larger employers to withstand significant fluctuations in their cash flows. Such clients prefer costs that are stable and predictable to the extent possible. Much has been written about how the required contributions to fund defined benefit pension plans have significantly increased in recent years. Small and medium sized employers tend not to do the sophisticated analysis done by large employers with plans having several hundred million dollars of assets or more, and the reality is few have a dedicated pension or investment expert on staff. As a result, these employers have been surprised by the recent increases. They also tend to have less ability than larger employers to find the means to fund such increased contributions of the pension plans. In extreme cases, it may cause bankruptcy of the employer.
The quick reaction of the employer is to eliminate the fluctuations by either switching to a defined contribution plan or winding up the plan. This shifts the investment risk from the employer to the employees.
For these reasons, we fully support any move to reduce the fluctuations in required contributions to defined benefit pension plans. Two examples are i) extending the period to fund solvency deficits without conditions and ii) requiring annual valuations only if the solvency ratio is below, say, 0.8 rather than the current threshold of 1.0. We also support moves to improve the creditor protection for a deficit of a pension plan in the event of bankruptcy of the employer.
We appreciate that funding a defined benefit pension plan involves the issue of timing and is independent of the ultimate costs of benefits. The costs depend on the demographics of the employees, the average returns on investments and the level of interest/annuity rates when lump sum assets are transferred from the plan. Lower contributions to the plan now may mean higher contributions later if the costs do not change. The consultation paper has not considered these issues.
While we will leave the detailed discussion on the relative merits of the various alternatives to other interested groups, we did want to voice our support of the goal of eliminating the fluctuations in cash flows for employers.
Original on letterhead signed by Ted Ballantyne
A.E. (Ted) Ballantyne, LLM, CMA, TEP
Director, Advanced Tax Policy