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The TELUS Corporation's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:
September 15, 2005
Ms. Diane Lafleur
Financial Sector Policy Branch
Department of Finance
20th Floor, East Tower
140 O'Connor St.
Ottawa, ON, K1A 0G5
Re: Government of Canada, Department of Finance
Consultation on Private Defined Benefit Pension Plans
Dear Ms. Lafleur:
TELUS Corporation is a federally regulated company with annual revenue of $7.9 billion and is the largest telecommunications company in Western Canada and the second largest in the country. TELUS provides customers with a full range of telecommunications products and services across Canada, utilizing next generation Internet-based technologies. At June 30, 2005 TELUS had 28,706 team members including approximately 17,200 team members who belong to defined benefit pension plans. TELUS sponsors seven defined benefit plans with aggregate pension liabilities of approximately $5.4 billion and also contributes to a negotiated contribution jointly-trusteed defined benefit plan with liabilities of approximately $2.3 billion. These plans have a total membership including actives, deferred pensioners and retirees of over 37,000 people.
This letter is in response to your invitation to comment on the how to strengthen the legislative and regulatory framework for defined benefit pension plans registered under the Pension Benefits Standards Act, 1985. We consent to the posting of these comments to your Web site.
|The Government of Canada is seeking views as to whether there are any disincentives or obstacles preventing plan sponsors from adequately funding their plans and building up a funding cushion.|
The asymmetry in surplus ownership under the PBSA is a material disincentive to companies wishing to adequately fund their plans. The employer is responsible for paying off deficits but often cannot access plan surpluses, which may develop as a result of conservative funding policies that incorporate a safety margin in the amounts contributed to a pension plan. Companies that fund more than the minimum required and make voluntary contributions to increase benefit security, for tax planning or other reasons should not in effect be penalized.
The July 29, 2004 Supreme Court of Canada decision in Monsanto Canada Inc. v. Ontario (Superintendent of Financial Institutions), which requires distribution of surplus on the partial wind up of a defined benefit pension plan, greatly exacerbates the asymmetry issue as defined benefit plans are further exposed to paying out surplus that results from responsible and conservative pension funding practices or a temporary fortuitous financial market development. Plan sponsors in affected jurisdictions have little control over triggering a partial wind up and are exposed to material litigation risk created by disputes over how surplus is to be distributed.
Provisions of the Income Tax Act also prevent plan sponsors from adequately funding their pension plans. Tax provisions should be less restrictive on the size of the surplus as sponsors need to be able to build adequate surplus buffers to withstand expected declines in funded positions.
|The Dispute Settlement Mechanism for Surplus Distribution|
|The Government of Canada is seeking views on whether the dispute settlement mechanism for surplus distribution contained in the PBSA requires improvement or clarification.|
|The introduction in 1998 of a dispute settlement mechanism for surplus distribution is generally helpful. Nevertheless, it can be challenging to demonstrate entitlement to a surplus for some older plans that are the legacy of multiple mergers over a period of many years. In the absence of clear documentation, obtaining support for a proposal to withdraw a surplus is also challenging as responses must be received from members, former members and others entitled to a benefit under the plan. TELUS has no specific recommendations for improvement or clarification but would be supportive of changes to the process and relaxation of thresholds that would facilitate surplus distribution in such cases.|
|Distribution on Partial Termination|
|The Government of Canada is seeking views on whether there should be partial plan terminations under the PBSA and if so, should there be a requirement to distribute surplus at the time of the partial termination.|
TELUS supports the existing provisions of the PBSA that permit partial plan terminations without distribution of a surplus at the time of the partial termination. Any distribution of surplus on partial termination could have a negative potential impact on the ability of the plan sponsor to meet future pension obligations, which is contrary to the practices in most other jurisdictions and is a material disincentive for corporations to provide defined benefit pension arrangements.
A confirmation of the current approach would be useful but the continuing uncertainty created by multiple regulatory jurisdictions and conflicting legal judgments have resulted in defined benefit plans being increasingly viewed as unattractive from an employer's point of view. TELUS, like many other employers, is evaluating whether it should continue to offer a defined benefit pension option for new management employees rather than simply a defined contribution pension or group RRSP.
|Letters of Credit|
The Government of Canada is seeking views on whether there are alternative financial vehicles, such as letters of credit, that could allow for greater funding flexibility.
What types 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?
Letters of credit could be a useful tool to help manage funding issues that are transitory. Letters of credit are backed by the credit of the issuing financial institution and provision could be made to require a specific credit rating for the issuing financial institution.
Letters of credit could be issued which would remain in place until a new actuarial valuation was completed that support the release of the letter of credit or the issuance of a letter of credit in a reduced amount. If a subsequent actuarial valuation were not completed within a fixed period of time, then the trustee should be obligated to call upon the instrument with the resulting funds being contributed to the plan.
Any changes with respect to securing pension obligations by way of letters of credit should be done in addition to addressing the fundamental surplus asymmetry issue discussed under Surplus above.
|Extending Solvency funding Period to 10 Years|
The Government of Canada is seeking views on what the appropriate amortization period is and whether it is different for financially vulnerable and financially strong companies.
The Government of Canada is seeking views on what types of conditions or rules should be attached to any extended amortization period for solvency funding for companies under CCAA or BIA.
TELUS believes that the amortization period should only be extended in extreme situations such as CCAA or BIA if the plan is carefully monitored and restrictions implemented in areas such as benefit improvement.
Extended amortization for highly rated companies could be considered, but would need to be carefully implemented as this structure could act as a credit rating trigger if the business subsequently became stressed. Addressing the fundamental asymmetry issue outlined above (including the letters of credit feature) is fundamentally a better long-term approach as it removes a material disincentive to appropriate funding.
|Alternatives to Relaxing Funding Requirements|
|The Government of Canada is seeking views on whether there are alternatives to address funding issues other than relaxing funding requirements. For example, would special accounts for pension plans be feasible?|
A special account that would include the amounts paid in excess of the minimum funding requirements, which could be returned, would be helpful. This approach is consistent with more fully securing the pension on a wind-up basis and provides assurance to a plan sponsor that the contribution is in fact a long-term requirement of the plan.
Any mechanism would need to be clearly outlined and not result in plan sponsors being exposed to subsequent legal challenges if the appropriate process was followed.
|Disclosure of Funding Information|
|The Government of Canada is seeking views on 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.|
For public reporting entities such as TELUS that are active in the public capital markets, the financial condition of the sponsor is widely available via public disclosure filed on SEDAR, credit rating agency reports and investment analyst reports. In fact, credit rating agencies are increasingly focusing their attention on deficits in a company's defined benefit pension plans and if material will treat the deficit amount as debt for the purposes of credit analysis.
Recent improvements in financial disclosure have been made by public reporting issuers in response to new accounting guidelines, securities regulation and investor concerns. Increased standardization around best practices will also facilitate easier comprehension by financial analysts. An explicit funding policy would prove beneficial in terms of governance and disclosure (e.g. utilization of surplus after buffer requirements are met). In contrast, actuarial valuation reporting can be very complex and the distribution of actuarial reports is unlikely to be a useful communication tool.
The Government of Canada is seeking views on its proposal to implement the void amendments of the PSBA based on a prescribed solvency ration level of 85 per cent, and to reduce the priority of claims against pension plan assets for recent benefit improvements that have not been fully funded. Specifically:
Is an 85 per cent solvency ratio an appropriate threshold for applying the proposed controls and conditions on plan improvements?
Should pension plans with solvency ratios below 85 per cent be permitted to make plan improvements provided that offsetting funding is provided at the time that the improvement comes into effect?
Would the proposed priority scheme improve security of longer-established benefits?
TELUS believes that a solvency ratio of 100 per cent would be a more appropriate threshold for net benefit improvements. Plan sponsors would also be well served by developing Funding Policies which may specify higher levels of solvency before net benefit increases would be considered. Net benefit improvements for plans with a solvency ratio of less than 100 per cent should be permitted if offsetting funding is provided at the time the improvement comes into effect.
The proposed priority scheme creates increased complexity and may not be required, if action is taken on our proposed higher threshold level.
|D.||Full Funding on Plan Termination|
|The Government of Canada is seeking views on full funding on plan termination, and in particular how it should be applied to financially vulnerable sponsors.|
|TELUS believes that financially vulnerable sponsors should be treated the same.|
|E.||Pension Benefit Guarantee Fund|
|The Government of Canada is seeking views on the viability of a federal pension guarantee fund including any comments on its possible design, operation, and powers.|
TELUS believes that mandatory pension guarantee arrangements would penalize credit worthy sponsors that fund their plans on a conservative basis. Increasing costs on conservatively managed plans is inconsistent with the long term objective of providing secure retirement income to beneficiaries.
It is instructive to look at the experience in the United States. It has recently been reported that the Pension Benefit Guaranty Corp that insures private pensions could see its deficit balloon to $71 billion during the next decade. This federal agency, which already has a $23.3 billion deficit, could face a threefold increase because companies are shedding their pension obligations in bankruptcy court because premiums for the insurance it provides have not kept pace with claims.ï¿½
We appreciate the opportunity to comment on this subject of importance to Canadian pension participants and trust that you will find our input constructive and useful.
EVP & Chief Financial Officer