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

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

Submission made by Bell Canada

September 2005

Introduction

On May 26, 2005, the Department of Finance, Canada issued a Consultation Paper on how to strengthen the legislative framework for defined benefit pension plans registered under the Pension Benefits Standard Act, 1985 (PBSA) in order to improve the security of pension benefits and better ensure the long-term viability of defined benefit pension plans. This paper presents the position of Bell Canada as a plan sponsor.

The Bell Canada Pension Plan (the "Plan") is a federally registered pension plan with assets of $10.7 billion as at December 31, 2004. Over 35,000 employees and 37,000 former employees and beneficiaries participate in the Plan. The Plan is mature, with pensioners and beneficiaries accounting for more than 70% of the Plan liabilities.

Until December 31, 2004, the Plan was a non-contributory defined benefit (DB) plan. Starting January 1, 2005 a defined contribution (DC) component was introduced to our Plan and members were given the choice of staying in the DB Plan or moving to the DC Plan for future benefit accrual.

Bell Canada Position

This submission summarizes Bell Canada's views on the problems threatening the viability of DB pension plans, and provides recommendations to improve the current regulatory framework. Attachment I provides Bell's response to the specific issues addressed by the Consultation Paper.

Asymmetry

Bell Canada believes that the current asymmetry of surplus/deficit ownership is a key problem related to the funding of DB plans.

Bell has always maintained a well funded pension plan and is dedicated to maintaining the long-term benefits security of its employees. While acknowledging that funding of pension plans over the minimum required level reduces pension contribution volatility over time, Bell considers the current asymmetry of surplus/deficit ownership ( whereby deficits must be covered by plan sponsors while the ownership of surplus is questionable) to be a strong disincentive to increase pension funding over and above the minimum required level.

Under the current regulatory framework, trapping capital through solvency contributions which may not be required for funding promised benefits does little for plan members and works against the interests of the company's shareholders. Bell is of the opinion that it is appropriate to provide plan sponsors with a mechanism to recover solvency contributions if a plan later develops a surplus.

Legislation reform should be introduced to allow pension surplus to belong to the plan sponsor in situations where only the employer contributes to the pension plan and bears the entirety of the funding risk. The federal government should address the uncertainty over surplus ownership which has arisen as a result of the Monsanto decision by the Supreme Court of Canada, including confirmation that a surplus distribution is not triggered upon partial wind-up.

Plan Funding and Solvency

Bell Canada believes that the current standard for computing solvency liabilities is significantly flawed and inconsistent with the long-term nature of pension plans, particularly in the case of large, well capitalized investment-grade companies.

The main objective of funding a pension plan is to ensure the security of pension benefits both in the long-term and upon a plan wind-up. As a plan sponsor, Bell Canada acknowledges and supports the appropriateness of maintaining the two currently prescribed funding tests based on the going-concern and solvency methodologies.

The fact however that the solvency ratio for many DB pension plans has been consistently below the going-concern funding ratio over the last few years highlights the inconsistency of assessing funding on the basis of a volatile and arbitrary test that is at odds with the long-term nature of pension obligations.

Solvency Test

The current solvency test requires a plan sponsor to maintain a fund sufficient to cover the cost of purchasing annuities on the assumption that in a hypothetical wind-up scenario plan benefits of retired members will be settled by way of the purchase of group annuity contracts. The annuity market in Canada however is not at all large enough to absorb the settlement of any significant amount of pension obligations. In the case of Bell Canada, this approach would require the settlement of over $10 billion of pension liabilities, while the entire Canadian group annuity market is estimated to be well less than $1 billion.

There are a number of alternatives to the annuity purchase settlement methodology currently prescribed. Bell believes that the most realistic and appropriate settlement methodology is that pensioners would receive a lump sum commuted value, calculated based on a benchmark discount rate derived from a diversified basket of long-term investment grade fixed income instruments.

Solvency Valuation

Generally accepted actuarial practice is to base the solvency test on an annuity purchase proxy rate published by the Canadian Institute of Actuaries (CIA). This proxy is driven by economic conditions prevailing at the time of the actuarial valuation and as such, is highly volatile.

The basis used for deriving the CIA proxy rate is a sample of annuity purchases. For example, in 2004, the proxy was based on 43 annuity purchases, with each annuity contract representing 70 pensioners on average, and with an average premium per annuity of $6.7M. Obviously, this is not representative of the situation of many federally regulated plans. Moreover, given the imbalance between supply and demand of the annuity market as compared to the fixed income market, this methodology results in the application of an artificially low proxy rate and thus significantly overstates solvency liabilities. New funding standards in the U.S. have addressed this anomaly by prescribing that pension liabilities be valued by reference to a discount rate based on long-term corporate bond yields. Other countries have implemented similar approaches.

In view of these considerations, Bell believes the PBSA should be amended to provide for the determination of solvency liabilities for large indexed plans like Bell to be made by reference to a long-term investment grade fixed income benchmark.

Funding of Solvency Deficit

Bell Canada supports the use of letters of credit to address solvency shortfalls, as they give employers greater flexibility in cash flow management while still promoting benefit security. The face amount to be covered by such an instrument would be the accumulated difference between the contributions needed to fund the total deficit (going concern and solvency) over the appropriate period and the contributions needed to fund only the going concern deficit over 15 years. If the plan has a solvency surplus, then the sponsor should be permitted to cancel the letters of credit.

Bell Canada also believes that the solvency deficit amortization period should be increased for investment-grade companies. An amortization period of 15 years would be consistent with the going concern amortization period and recognize the long-term nature of pension obligations.

Proposed Regulatory Reform

Bell Canada urges the federal government to continue moving forward with its review of pension legislation to rectify the asymmetry issue and recognizes the need to balance the interests of both sponsors and beneficiaries of defined benefit pension plans.

Bell Canada strongly believes that immediate amendment to the PBSA and Regulations is required to:

  • redefine the solvency test to reflect a more appropriate wind-up scenario whereby lump-sum settlements are determined by reference to a long-term investment grade fixed income benchmark;
  • extend the solvency amortization period for investment-grade companies to 15 years; and
  • allow for the use of letters of credit to address solvency shortfalls.

Bell appreciates that the government has chosen to address this important public policy issue and is pleased to participate in the consultation process regarding the legislative and regulatory framework for defined benefit pension plans. Our recommendations are aimed at safeguarding the role of defined benefit pension plans and thereby providing enhanced benefit security for our employees and pensioners and indeed all Canadians.

Attachment I

Surplus

Issues for discussions

The Government of Canada asked for views on

  • possible changes to the regulatory framework for private pension plans that could provide more certainty about surplus distribution;
  • how to improve incentives for plan sponsors to help fund their plans beyond the minimum requirements;
  • whether the dispute settlement mechanism for surplus distribution contained in the PBSA requires improvement or clarification; and
  • whether there should be partial plan terminations under the PBSA and if so, whether there should be a requirement to distribute surplus at the time of the partial termination.

Bell Canada position

  • Current asymmetry of surplus risk creates incentive to adopt a minimum funding policy and reduces incentive to accelerate the funding of any pension deficit
  • The law should allow surplus to belong to the sponsor if:
  • only the employer contributes to the pension plan and bears the risk, and
  • the plan text does not specify that plan members are entitled to some of the surplus
  • It would be desirable to provide ability to plan sponsors to recover solvency contributions if a plan later develops a surplus
  • Current dispute settlement mechanism for surplus distribution is not equitable. To secure the required two-thirds member consent would typically require a significant sharing of surplus with members. Unless the plan text specifies that plan members are entitled to some of the surplus, the sponsor should have discretion over the use of surpluses
  • If partial plan termination are not completely eliminated, partial plan termination members could be given a contingent right to any surplus distribution on full plan termination if within a definite period of time (reasonably short, e.g. 5 years). This would alleviate the administrative burden for the sponsor
  • The prospect of having to distribute a portion of the plan's surplus to those members who are included in a partial plan termination (if the plan has a solvency surplus at that time) is a further disincentive to contributing more than the minimum required

Funding

Issues for discussions

The Government of Canada asked for views on

  • whether there are alternative financial vehicles, such as letters of credit, that could allow for greater funding flexibility;
  • what type of conditions or rules should be required if greater funding flexibility is given to plan sponsors, to ensure that the risk to benefit security is minimized;
  • what is the appropriate amortization period for solvency funding and whether it is different for financially vulnerable and financially strong companies;
  • what types of conditions or rules should be attached to any extended amortization period for solvency funding for companies under CCAA or BIA;
  • whether there are alternatives to address funding issues other than relaxing funding requirements; and
  • whether there should be greater disclosure provided to plan members regarding a plan sponsor's financial condition, funding decisions and contribution holidays and how this may be done.

Bell Canada position

Bell Canada proposes the following measures to increase flexibility in pension funding rules:

  1. allow investment grade companies to determine solvency liabilities by reference to an investment grade portfolio of corporate bonds instead of the annuity purchase proxy;
  2. lengthen the solvency deficit amortization period; and
  3. allow the deposit of letters of credit to deal specifically with short-term solvency deficiencies.

Adjusting the solvency discount rate to a more appropriate high quality bond benchmark:

  • Rationale is that annuity purchase proxy is not appropriate for large and/or indexed pension liabilities
  • Could be restricted to investment grade companies to ensure that the risk to benefit security is minimized

Lengthening the solvency deficit amortization period:

  • The solvency deficit amortization period could be increased for investment-grade companies to 15 years

Deposit of letters of credit:

  • Rationale is that it provides necessary short term benefit security, while giving employers greater flexibility in cash flow management
  • The face amount to be covered by such a vehicle would be the accumulated difference between the contributions needed to fund the total deficit (going concern and solvency) over the appropriate period and the contributions needed to fund the going concern deficit alone over 15 years
  • The letter of credit should be included in the plan solvency assets but not in the going concern assets
  • If the plan has a solvency surplus, then the sponsor should be permitted to cancel the letters of credit

Bell Canada believes that sponsors should have a written statement of funding policy and supports the disclosure of such to plan members. Information should be provided to members regarding the sponsor's financial condition based on publicly available data.

Void Amendments

Issues for discussions

The Government of Canada asked for views on

  • whether an 85% solvency ratio is an appropriate threshold for applying the proposed controls and conditions on plan improvements;
  • whether pension plans with solvency ratios below 85% should be permitted to make plan improvements provided that offsetting funding is provided at the time that the improvement comes into effect; and
  • whether reducing the priority of claims against pension plan assets for recent benefit improvements that have not been fully funded would improve security of longer-established benefits.

Bell Canada position

  • Bell Canada supports the proposed change
  • Pension plans with solvency ratios below the threshold should first contribute to increase the solvency ratio to the appropriate threshold before being permitted to make plan improvements
  • Including some absolute dollar threshold for new plans or smaller plans may provide additional flexibility to sponsors
  • Introduction of such a lower priority claim would address a potential inequity between different member classes in the event the plan is terminated

Full Funding on Plan Termination

Issues for discussions

The Government of Canada asked for views on full funding on plan termination, and in particular how it should be applied to financially vulnerable sponsors.

Bell Canada position

  • Bell supports the proposal to require plan sponsors to fully fund any solvency deficit on plan termination, provided surplus asymmetry is satisfactorily addressed

Pension Benefit Guarantee Fund

Issues for discussions

The Government of Canada asked for views on the viability of a federal pension guarantee fund including any comments on its possible design, operation and powers.

Bell Canada position

  • A pension guarantee fund could be a disincentive for some plan sponsors to act prudently, especially when financial situation becomes precarious. Such fund could result in an inflated cost for plan sponsors with a sound financial position
  • Bell is concerned that that it would be subsidizing less secure plans
  • Bell is aware that similar initiatives in Ontario and in the US have not proven successful. A national program (implicitly backed by the federal government) would have a greater chance of success