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Marine Atlantic's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:

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

Marine Atlantic Submission to the Department of Finance - Financial Sector Division

Marine Atlantic Inc. welcomes this opportunity to provide comments on this important consultation paper. This is the appropriate time to be making changes to the regulatory framework as defined benefit plans are under increasing pressure.

Disincentives preventing plan sponsors from building up a funding cushion

Marine Atlantic believes that there are indeed disincentives preventing plan sponsors from building up a funding cushion. We note two such key disincentives:

  • the "asymmetry" in pension plan funding. Such "asymmetry" results from the fact that plan sponsors are responsible for funding plan deficits without having clear ownership of surpluses.
  • the relatively low level of the surplus limit imposed under the income tax rules over which employer contributions are not allowed.

Dispute settlement mechanism for surplus distribution

The mechanism has worked relatively well, except for the delays involved, and except for the effect of the "asymmetry" in pension plan funding.

We support that in light of the fact that the plan sponsor bears the financing risk of the pension plan while the plan is ongoing, and must make significant contributions to fund solvency deficits, certain assets should be exempted from the dispute settlement mechanism and be attributed to the plan sponsor.

With respect to the delays, in one instance, such delays were increased as a result of having to disclose historical plan provisions which were difficult to obtain. In light of the fact that the federal legislation does not require to demonstrate that the employer has surplus ownership to proceed under the claim route, OSFI should be less strict in its requirements when applying these mechanisms.

The legislation would gain to be clarified with respect to the exclusion from the sharing group of former employees who have terminated employment in normal circumstances and were not entitled to a deferred pension.

Distribution on partial termination

We are of the opinion that distribution of surplus on partial termination should not be required.

Requiring distribution of surplus upon partial termination will result in the weakening of funding of pension plans for remaining plan members and will also lead plan sponsors to fund plans at a minimum.

We also support the elimination of partial terminations for future events.

Funding issues

We are concerned that the high levels of solvency funding required currently may produce significant going-concern surpluses in the future, which would be problematic in light of the "asymmetry" issue mentioned above. Under the existing regime, such going-concern surpluses will lead to pressures from plan members for plan improvements, which will translate into additional risk being borne by the plan sponsor.

Also, the requirement for annual solvency valuations creates extreme volatility in required employer contributions, which puts pressure on our budgeting process. This pressure is compounded by the retroactive application of increased contributions to the valuation date.

We therefore submit the following comments, in order of preference.

  1. We believe that as a Crown Corporation, Marine Atlantic should be exempted from having to fund the pension plan in accordance with a solvency valuation. The going-concern valuation is a better representation of the financial position of the plan, in light of the remote possibility that the pension plan will be totally terminated.
  2. In the event that the solvency valuation continues to be required, we support the recognition of letters of credit or other letters of guarantee as pension assets in the solvency valuation. Such letters of credit or letters of guarantee should meet prescribed requirements and should cover the special payments that would be required to amortize solvency deficits in excess of going-concern deficits. However, the letters should be permitted to be withdrawn if the plan becomes solvent without considering the letters as an asset.
  3. We also support the relaxation of solvency valuation rules in cases where the letter of credit or other letter of guarantee does not apply and where a solvency valuation is required. In this respect, we support longer solvency amortization periods and less frequent required valuations for plan sponsors that are financially strong or backed by government, in the event that the letter of credit or letter of guarantee does not apply, or in other cases, if members consent. Also, the amortization of losses revealed by the valuation could be deferred to the date of filing of the valuation rather than having a retroactive effect to the valuation date.
  4. As mentioned earlier, we would also support the creation of special accounts comprising special payments made by the plan sponsor to fund solvency deficits, where such special accounts would be exempted from the dispute resolution mechanism and would clearly be attributed to the plan sponsor.

With respect to companies under CCAA or BIA, we believe that OSFI should have flexibility to apply rules that may vary with the circumstances of each case.

Disclosure

We support disclosure of the plan's financial information, including contributions made or holidays taken.

We do not believe that the requirement to adopt a funding policy would be useful in the absence of changes to attribution of surplus rules. As noted previously, in the current environment, plan sponsors do not have an interest in funding at more than the minimum required by law.

We do not believe it is appropriate to add requirements to disclose information regarding the plan sponsor's financial condition. Such information is already generally available, except in the case of privately held companies, and is subject to interpretation, which is better left to specialists.

Void amendments

We support the concept of void amendments for plans having important deficits, either going-concern or solvency.

We do not believe that a lower priority should be given to recent plan improvements.

Full funding on plan termination

We support the notion of full funding upon plan termination, over a period of time.

Pension Benefit Guarantee Fund

We do not believe that a federal pension guarantee fund should be created, for the reasons noted in the consultation paper. Most important, we believe that such a fund would provide a disincentive for employers to properly manage their pension plans. The recent experience of PBGFs in Ontario and in the U.S. indicates the shortcomings of this approach.