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Canadian Life and Health Insurance Association Inc. Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:

September 26, 2005

Ms. Diane Lafleur
Director, Financial Section Division
Department of Finance
20th Floor, East Tower
140 O'Connor Street
Ottawa, ON
K1A 0G5

Dear Ms. Lafleur:

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

Further to our recent conversation, Canada's life and health insurance industry is pleased to participate in the Department's consultative process regarding the captioned discussion paper.

Life insurers have a vital stake in assisting Canadians in planning for their retirement. The industry administers over $100 billion in pension and retirement savings plan assets, of which approximately half relates to registered pension plans. The industry specializes in the administration of small and medium-size pension plans, primarily but not exclusively in the defined contribution sector. As a result, roughly two-thirds of all pension plans in Canada are funded by insurance contracts.

The industry encourages harmonization and simplification of pension regimes throughout Canada, and looks forward to actively participating in further consultations with the Department and other interested stakeholders. CLHIA stands ready to provide any further clarification that you or your officials might wish relating the matters addressed in the attached submission.

Yours truly,

Original signed by

Ron Sanderson
Director, Policyholder Taxation and Pensions


Submission to The Department of Finance on Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the Pension Benefits Standards Act, 1985 by the Canadian Life and Health Insurance Association Inc.

September 2005

Table of Contents

Executive Summary

I. Introduction

II. Issues Raised in the Consultation Paper

III. Other Defined Benefit Pension Plan Funding Issues

IV. Conclusions

Annex A – The Life and Health Insurance Industry in Canada's Economy

Executive Summary

The Canadian Life and Health Insurance Association Inc. (CLHIA) is pleased to have the opportunity to provide comment on the Department of Finance's consultation paper, Strengthening the Legislative Framework for Defined Benefit Pension Plans Registered under the Pension Benefits Standards Act, 1985. In consideration of the issues raised in the consultation paper, the life and health insurance industry puts forth the following points:

  • Consultations with pension regulators and stakeholders throughout Canada should continue in order to facilitate the on-going harmonization and simplification of pension regimes and the development of a cost-effective compliance model for all pension plans,
  • More accountable and flexible mechanisms for plan funding and valuation are needed to promote the creation and maintenance of defined benefit pension plans,
  • The development and disclosure of formalized funding strategies and practices is a means of better addressing concerns of plan members regarding the security and stability of future benefits,
  • A prudent approach to pension investment and funding practices should be adopted, coupled with proactive, on-going, evaluation of the relative level of plan assets and liabilities, rather than relying on a reactive, public, pension benefit guarantee fund,
  • Dispute settlement mechanisms related to surplus can be enhanced via more transparent accounting of sponsor and member contributions,
  • An appropriate cost balance should be maintained between the security of future pension benefits and the current sustainability of members' employment and the viability of plan sponsors, and
  • An efficient regulatory environment for defined contribution pension plans should be preserved.

I. Introduction

CLHIA appreciates this opportunity to contribute.

The Canadian Life and Health Insurance Association Inc. (CLHIA) is pleased to have this opportunity to contribute to the deliberations of the Department of Finance with respect to its recent consultation paper, Strengthening the Legislative and Regulatory Framework for Defined Benefits Pension Plans Registered under the Pension Benefits Standards Act, 1985.

23 million Canadians are protected by life and health insurance products.

Established in 1894, CLHIA is a voluntary non-profit organization which represents companies accounting for 99 per cent of Canada's life and health insurance business. The industry's products include life insurance, disability insurance, supplementary health insurance, annuities, RRSPs and pensions. About 23 million Canadians are protected by these products. The industry also protects about 20 million policyholders elsewhere in the world. In total, benefits paid to Canadians were $47.8 billion in 2004.

Investments in Canada: $342 B in 2004

As well as providing direct protection to Canadians, the industry is a major contributor to the Canadian economy. Investments in Canada were about $342 billion in 2004. The industry is a major employer, with about 118,000 Canadians earning some or all of their income from the industry.

Other consultative processes

In parallel with this review by the Department of Finance, several similar consultative processes by other regulators and industry stakeholders are currently underway or have recently been completed. These include:

  • A Draft Statement of Principles of Revised Actuarial Standards of Practice for Reporting on Pension Plan Funding

, issued by the Canadian Institute of Actuaries (CIA),

  • A consultation entitled Toward Better Funding of Defined Benefit Pension Plans undertaken by the Régie des rentes du Québec,
  • Proposed Funding Principles for a Model Pension Law
  • , as put forward by the Canadian Association of Pension Supervisory Authorities (CAPSA), and
  • Back from the Brink: Securing the Future of Defined Benefit Pension Plans
  • , a report by the Association of Canadian Pension Management (ACPM).

In addition, there have been several recently released documents considering the impact of comprehensive pension plan governance processes on funding and benefit security, including guidance from both CAPSA and the Organisation for Economic Co-operation and Development.

CLHIA favours a harmonized and consistent approach to pension plan funding and regulation.

In developing this document, the CLHIA has considered the proposals and recommendations of each of these consultations in an effort to promote a harmonized and consistent approach to pension plan funding and regulation.

The industry also notes that the short-term impact of both depressed valuation interest rates and low investment yields that have been experienced in recent years should not be the basis for formulating long-term pension policy, since it could lead to inappropriate results in the longer term.

Issues raised in the consultation paper

In its consultation paper, the Department of Finance solicits input from interested Canadians on ten issues relating to the regulatory regime for defined benefit pension plans. While some of these issues can be more immediately characterized as relating to use of surplus, all are ultimately driven by plan funding. The issues raised by the Department of Finance can be summarized as follows:

  • Disincentives to Adequate Funding and Surplus Creation,
  • Dispute Settlement Mechanism for Surplus Distribution,
  • Surplus Distribution on Partial Termination,
  • Funding (Use of Letters of Credit),
  • Extending Solvency Funding Period to 10 Years,
  • Alternatives to Relaxing Funding Requirements (Notional or Separate Accounting),
  • Disclosure of Funding Information,
  • Void Amendments,
  • Full Funding on Plan Termination, and
  • Pension Benefit Guarantee Fund.

Other defined benefit pension plan issues

In addition to the issues put forward in the Department of Finance's consultation paper, the industry is concerned about other defined benefit pension plan funding issues which have the potential for increasingly divergent regulatory protocols throughout Canada. As a general framework for the consideration of pension reform measures, the life and health insurance industry offers some views in this submission on the following matters:

  • Balancing Benefit Security and Employment Security,
  • Harmonization and Simplification,
  • Flexible Valuation Standards,
  • Consistent Valuation Standards,
  • Contribution Holidays, and
  • Preserving Regulatory Efficiency.

Thus, this submission is structured as follows:

Part II presents the industry's perspective on the issues raised in the consultation paper,

Part III deals with other pension plan funding issues,

Part IV sets out some concluding remarks, and

Annex A provides a more detailed profile of the life and health insurance industry in Canada.

II. Issues Raised in the Consultation Paper

The Department of Finance has characterized the objective of this consultation as being "to improve the security of pension plan benefits and ensure the viability of defined benefit pension plans".

Within the employer-sponsored pension realm, the cost and complexity – both perceived and real – of creating and maintaining defined benefit plans pose real challenges to the viability of such plans.

There have been substantial movements away from defined benefit pension plans.

In recent years, there have been substantial movements away from defined benefit pension plans and toward defined contribution pension plans, in part due to the less onerous regulatory regimes governing such plans.

These concerns have been compounded by the sponsor's obligation to fund any shortfall within a defined benefit pension plan, without a corresponding right to access any surplus derived from the sponsor's contributions.

It may be argued that defined benefit pension plans encourage employee loyalty, and thereby promote the long-term health and sustainability of the sponsoring organization more effectively than defined contribution pension plans. Unfortunately, the argument appears to be insufficient to offset the triple disincentives of cost, complexity and surplus/shortfall asymmetry associated with defined benefit plans.

The choice of pension plan design should reflect the needs of sponsors and members, not regulatory complexity.

A sponsor's choice of pension plan design should reflect the needs and circumstance of the sponsor and plan members, rather than being driven by differential complexity of regulation.

The industry's objective is to provide cost effective, value-driven products to sponsors and plan members.

Regardless of the plan design chosen by the sponsor, the industry's objective is to provide cost effective, value-driven products to sponsors and plan members.

Pension regulation should commit to simplifying compliance and administration.

Thus, any policy-based effort to counter the observed migration away from defined benefit pension plans must demonstrate a commitment to simplifying compliance and administration for such plans, and provide more incentive to sponsors than exist at present. Perhaps most importantly, serious efforts must be undertaken to remove the financial disincentives for sponsors with respect to plan funding.

II.1 Disincentives to Adequate Funding and Surplus Creation

The obligation for a defined benefit pension plan sponsor to ensure that promised benefits are adequately funded leads to a regulatory desire to maintain surplus assets within such plans, as a cushion against the possibility that investment market conditions, longer than anticipated survival of plan members or other factors might lead to an increase in plan liabilities relative to the assets otherwise held within the plan.

Limits on the sponsor's rights minimize surplus.

At the same time, limits on the sponsor's rights to access such surplus, together with limits on creation of surplus that are rooted in efforts to restrict the tax –assisted return on "excessive" surplus, lead to circumstances where most sponsors are likely to attempt to minimize any on-going surplus within a plan.

This asymmetry serves as a strong disincentive to employers to establish or maintain defined benefit pension plans.

Furthermore, it has been suggested that pension plan surplus represents funds that, absent a pension plan, would have been payable as enhanced employee compensation and that surplus should therefore be used solely to benefit employees.

The opposing view is that since the sponsoring employer is liable for any shortfall of the fund, any surplus, at least to the extent that it is traceable to employer contributions and amounts earned on those contributions, should be returned to the sponsoring employer, thereby limiting the asymmetry described above.

Current rules do not provide sponsors with access to surplus.

However, current rules do not provide sponsors with a parallel right of access to any surplus of plan assets over liabilities. This asymmetry serves as an additional strong disincentive to employers to establish or maintain defined benefit pension plans.

Several alternative approaches to plan funding have been suggested. While targeted at improving benefit security, some of these initiatives could compound the existing asymmetric rights and obligations of plan members and plan sponsors, thereby further discouraging the creation and maintenance of defined benefit pension plans.

Where surplus can be traced to sponsor contributions, it should be refundable without member consent.

A more balanced approach that addresses this asymmetry is required and considered in the remainder of this submission. Thus, the industry urges the Department of Finance to consider permitting the refund of surplus to employers upon wind-up where it is traceable to their contributions, without member consent, thereby limiting the asymmetry.

II.2 Facilitating Effective Dispute Settlements

It is not uncommon for the objectives of sponsors, current and former plan members and their respective beneficiaries, regulators and other stakeholders to come into conflict. Frequently, such conflicts revolve around the ownership of surplus within a pension plan, but as correctly noted by the Régie des rentes in its consultation paper, "it is not the government's role to decide surplus asset ownership. That responsibility must be assumed by the parties."

Surplus ownership is a matter to be addressed by the sponsors and members of the pension plan and not to be determined by the government.

CLHIA members respect the right of pension plan stakeholders to negotiate specific formulae or methods for determining entitlement to surplus and other plan benefits. However, where no such methods have been addressed, the default access rules of the Pension Benefits Standards Act, 1985, apply and sponsor's access to surplus arising from sponsor contributions appears to be unreasonably restricted. To the extent that plan members can limit a sponsor's access to surplus, there is no incentive for a sponsor to fund a plan at more than the minimum required level, which may jeopardize security of benefits.

Canada's life and health insurance companies contend that clarifying the source of funds held within a defined benefit pension plan could help to alleviate some of this conflict. To the extent that such amounts can be associated with projected surplus and can be attributed exclusively to the plan sponsor, it may be appropriate to allow the sponsor to withdraw any or all such projected surplus without consent of plan members or other plan beneficiaries. This is further discussed below under Part II.6, Alternatives to Relaxing Funding Requirements.

Consider evolving mechanisms for monitoring the sources and attribution of projected surplus.

The industry urges the Department of Finance to consider evolving mechanisms for monitoring the sources and attribution of projected surplus, and to evaluate the appropriateness of existing dispute settlement mechanisms in light of alternatives for allowing access to projected surplus without undue restrictions.

II.3 Surplus Distribution on Partial Termination

At present, the general view of the Pension Benefits Standards Act, 1985 is that it does not provide for the automatic or immediate payment of any part of a defined benefit pension plan's actuarial surplus to plan members whose participation in the plan is terminated due to a partial wind-up of the plan. This interpretation is based on the view that actuarial surplus can only be determined at full wind-up of the plan, and any amounts that might appear to be available as surplus at any time prior to full wind-up are potentially transitory. This interpretation concludes that it is only when all plan liabilities become fixed and payable that the existence of an actuarial surplus can be conclusively determined.

Immediate vesting of pension benefits for all plan members is a strong disincentive to plan creation.

The Department of Finance's consultation paper describes an alternative approach that has been adopted under the Quebec Supplemental Pension Plan Act, which requires immediate vesting of pension benefits for all plan members, instead of providing for partial terminations.

This latter approach has the potential to increase benefits payable beyond those negotiated or offered under the plan, and thereby increase the sponsor's cost. As previously indicated, such increased cost acts as a strong disincentive to plan creation, contrary to the policy objective of pension plan legislation.

Retain the current treatment of plan surplus as only being determinable upon full wind-up of the plan.

Canada's life and health insurance companies urge the Department of Finance to retain the current treatment of plan surplus as only being determinable upon full wind-up of the plan and not to enhance member benefits on partial termination based on assumed surplus, the existence of which is purely notional.

II.4 Funding (Use of Letters of Credit)

Restricted cash flow is often a temporary issue that need not harm the long-term viability of the enterprise.

Effective management of cash flow is central to the success of all businesses. However, matching of revenues and expenses can be an ongoing challenge, and on occasion, revenue may be in short supply relative to current expenses. But restricted cash flow is often a temporary issue that need not harm the long-term viability of the enterprise. Rather, it is an accepted occurrence in the normal course of business, and gives rise to the use of a variety of short-term debt instruments and alternative financing arrangements.

In a similar fashion, the ability of a pension plan sponsor to responsibly manage cash flow out of the sponsor's operating entity and into a pension plan, in keeping with the long-term obligations of the plan, may be more important than the timing of specific contributions.

In order to reconcile a sponsor's legitimate cash flow management concerns with its pension plan funding obligations, it has been suggested that the use of letters of credit and guarantees of funding issued by third-party financial institutions normally engaged in commercial lending could provide plan administrators and regulators with surety of funding, without unduly impeding the cash flow management objectives of the plan sponsor.

Increased variation in funding arrangements may increase consumer uncertainty.

The introduction of more flexible funding mechanisms for defined benefit pension plans is not intended to jeopardize the security of benefits provided under such plans. However, Canada's life and health insurance companies recognize that increased variation in funding arrangements may increase consumer uncertainty with respect to the security of plan benefits.

The adoption of formal funding policies could provide greater consumer confidence.

Unaccountable use of such alternative funding structures could jeopardize the provision of anticipated benefits. The development, adoption and publication of formal funding policies by all defined benefit pension plans could allow stakeholders to better monitor the appropriateness of more flexible funding strategies and provide greater regulatory and consumer confidence in the use of more flexible funding options.

Letters of credit and similar instruments should allow revocation should such assets no longer be required.

It should be noted that use of letters of credit and similar instruments should allow revocation by the plan sponsor should such assets no longer be required to satisfy the sponsor's funding obligations. Similarly, substitution using other qualified assets of appropriate value should not be restricted. Restrictions on the use of such assets should be comparatively few in order to satisfy the objective of providing flexibility in funding mechanisms.

Use of letters of credit and other guarantees of plan funding should be consistent with pension plan funding policies.

The CLHIA encourages the Department of Finance to more fully examine permitting the use of letters of credit and other guarantees of plan funding, consistent with pension plan funding policies, as a means of introducing more flexible funding methods for defined benefit pension plans.

II.5 Extending Solvency Funding Period to 10 Years

Poor investment performance may lead to additional plan funding requirements.

Flexibility in the timing of contributions diminishes the concerns of potential plan sponsors that establishing and maintaining a defined benefit pension plan may prove unduly onerous. This concern is particularly common when potential and existing sponsors consider the possibility that a plan may experience an unanticipated reduction in investment yield, requiring additional funding.

Both the Department of Finance and Quebec's Régie des rentes have suggested that an extended amortization period of 10 years (rather than the existing period of 5 years) be established for the funding of such deficiencies. While the Department has suggested that each deficiency be subject to a specific funding schedule, the Régie des rentes has suggested that, where sequential deficiencies occur, the funding obligations be consolidated over a new 10 year period commencing at the time when the most recent deficiency is identified. One interpretation of the Régie des rentes' proposals is that a 15 year amortization period be applicable on an interim basis, with an adjustment to the annual amount due determined at the end of the fifth year. That proposal is not entirely clear and further consultation with the Régie des rentes to determine the detailed intent of this proposal may be appropriate.

Consolidating of funding arrangements should be adopted by all jurisdictions regulating pension plans in Canada.

Where supplementary funding of a pension plan is required in order to address a deficiency, the proposal of the Régie des rentes to consolidate such funding arrangements imposes minimal financial strain on the plan sponsor, and should be adopted by all jurisdictions regulating pension plans in Canada.

An extended transitional mechanism to address recently depressed interest rates and equity markets should be considered.

Similarly, in the case of companies currently operating under the Companies' Creditors Arrangement Act or the Bankruptcy and Insolvency Act, an extended transitional mechanism to address the unusual recent experience of depressed interest rates and depressed equity markets, similar to that apparently being considered by the Régie des rentes, should be considered.

II.6 Alternatives to Relaxing Funding Requirements (Notional or Separate Accounting)

Conflicts between sponsors and plan members frequently relate to their respective entitlements to surplus.

As noted above, conflicts between sponsors and plan members frequently relate to their respective entitlements to surplus upon wind-up, or projected surplus prior to that time.

To more effectively facilitate the resolution of potential conflicts, it may be possible for sponsors and members to segregate their respective contributions to a defined benefit pension plan, together with investment income, expenses and benefit payments relating to those contributions, such that an employer may withdraw any portion of the projected surplus that can be attributed solely to contributions by the plan sponsor, without requiring the consent of the plan members or other stakeholders. While it is anticipated that such segregation of funding would be possible on a prospective basis, there may be situations where some plans would be able to also segregate pre-existing funding and asset records.

Segregated sponsor-funded and plan member-funded accounts could help support existing surplus rules.

Adoption of such segregated sponsor-funded and plan member-funded accounts could help support existing surplus rules in a manner that is both equitable and perceived to be equitable, thereby providing a significant advance in limiting cause for disputes over future access to surplus.

Canada's life and health insurance companies urge the Department of Finance to consult with other pension regulators and all plan stakeholders to develop possible approaches to allocating plan expenses and benefit payments to discrete sponsor- and member-funded accounts.

II.7 Disclosure of Funding Information

Within defined contribution pension plans, registered retirement savings plans and similar investment plans in which consumers can exercise their own discretion with regard to the actual investment options, regulators have perceived a need for additional support for individual plan members in their efforts to understand the operation of their plans. Addressing this need was the rationale behind the recent development of the Joint Forum of Financial Market Regulators' Guidelines for Capital Accumulation Plans and the adoption of the Guideline as part of CLHIA's own member standards. .

Individual plan members often fail to understand how their pension plans work.

In a similar manner, enhanced communication to plan members of the management strategies used by a defined benefit pension plan may lead to greater attention to, understanding of, and appreciation for the future benefits intended to be provided by the plan.

Such a communications initiative presupposes the existence of formalized management strategies and such strategies may not always have been clearly enunciated by those parties responsible for the management of a defined benefit pension plan.

While Statements of Investment Policies and Procedures ("SIP&Ps") have been developed by many plans and are required in most jurisdictions, these may not be well communicated to plan members and other stakeholders. More importantly, it would appear that few plans have formalized funding strategies that would operate in concert with any SIP&Ps.

Formalized funding strategies help ensure that plan funding mirrors the long-term objectives of the plan sponsor by focussing attention on how stable, tax- effective contributions can maximize benefit security; they promote equitable funding between generations of plan members and shareholders while minimizing cost over the term of the plan.

The adoption of a formalized funding strategy and the communication of that funding policy to defined benefit pension plan members could, when coupled with reporting of actual funding and investment performance, provide plan members with the information necessary to allow them to more adequately monitor the ability of their plan to actually providing the anticipated and intended benefits, and to responsibly evaluate any changes in funding or other proposed amendments to the plan.

Sponsors of defined benefit pension plans should be encouraged to develop and follow formalized funding strategies, and communicate those practices to plan members.

Sponsors of defined benefit pension plans should be encouraged to develop and adhere to formalized funding strategies, and CLHIA urges the Department of Finance to work with other stakeholders to develop voluntary best practices for the content of stakeholder communication materials relating to such funding strategies and actual funding practices.

II.8 Void Amendments

The Department's consultation seeks the views of stakeholders on the appropriateness of only permitting plan improvements where a plan's assets, evaluated on a wind-up basis, exceed 85 per cent of the projected liabilities determined on the same basis. In addition, the Department seeks input on whether recently approved plan improvements should have reduced priority relative to previously established benefits should a plan be terminated in a less than fully-funded state.

Benefit improvements can be used to increase member funding for underfunded plans.

The Régie des rentes has suggested that all plan amendments be contingent on a current valuation of the plan and that any such amendments be funded on the greater of a solvency or on-going basis. Alternative views, such as those of the Association of Canadian Pension Management, suggest that plan amendments that provide benefit enhancements should not be prohibited on the basis that the pension plan is currently underfunded on a going concern basis, and that governments should focus solely on solvency valuations.

As noted previously, it is only when a solvency deficit exists on plan wind-up that concern should arise with respect to recent benefit improvements.

Reduced priority for funding of recently enhanced benefits should provide greater certainty that the pre-existing basic pension benefits will be paid. A requirement to fund such enhancements over a comparatively short time frame would similarly improve funding of basic benefits in the event of a plan termination during that period. Such a hierarchy of benefit security would need to be clearly communicated to plan members at the time of any such enhancement.

Recently enhanced benefits should have a reduced priority for funding.

Canada's life and health insurance companies are not convinced that the suggested 85 percent solvency test is appropriate and would support a lower threshold level subject to benefit enhancements being fully funded on a going-concern basis over a limited period of perhaps five years. The industry also urges the Department of Finance to consider adopting reduced priority of funding in insolvency for recently enhanced pension benefits.

II.9 Full Funding on Plan Termination

When a pension plan is terminated, the sponsor is currently required to make payment of any outstanding contributions into the pension plan, but without the obligation to fully fund the pension plan. Thus, the promise of full benefits to members may not always be kept.

A plan sponsor should be held responsible for underfunded pension debt.

Requiring plan sponsors to address the plan's funding shortfall would strengthen pension funding requirements, but possibly to the detriment of the plan sponsor's ability to secure financing necessary to sustain viability, particularly when the plan sponsor is financially vulnerable.Nonetheless, Canada's life and health insurance industry supports the view that a plan sponsor should be held responsible for underfunded pension debt and that the policy goal should be to minimize any threat to the security of benefits subject to an appropriate transition or adjustment period and a reduced security for recent benefit enhancements, as noted in Part II.8, Void Amendments, immediately above. Appropriate durations for such transitional periods are discussed under Part II.5, Extending Solvency Funding Period to 10 Years.

II.10 Pension Benefit Guarantee Fund

As noted previously under Part II.7, Disclosure of Funding Information, SIP&Ps have been developed by many plans and are required in most jurisdictions. By defining a standard against which plan performance can be measured, such protocols reflect and facilitate sound governance and ready accountability of the administration of a pension plan.

When coupled with formalized funding policies and practices and the other initiatives described under Part II.7, such measures should allow all pension plan stakeholders a high degree of certainty that plan assets are, and will continue to be, sufficient to secure current and future benefits.

Such an approach provides a proactive means of avoiding and correcting funding deficiencies before they might jeopardize benefits. This is in contrast to pension benefit guarantee funds, which the industry views as being reactive rather than proactive in nature.

While some consultations and other jurisdictions have suggested or currently maintain public pension benefit guarantee funds, a strong governance regime, coupled with appropriate monitoring and early detection strategies, would appear to provide a preferred approach to protecting pension benefits. This is particularly the case given the wide variance in plan sizes and the resultant absence of a readily identifiable pool of comparable plans across which the risks of a claim on a guarantee fund might be spread.

A guarantee fund might encourage less prudent plan administration.

Equally importantly, the industry is concerned that the availability of a pension benefit guarantee fund may actually encourage less than prudent plan administration. Unlike private funding guarantees, the cost of which are clearly borne by the sponsor, guarantee funds risk encouraging the attempted transfer of responsibility for aggressive funding and investment practices from less than prudent sponsors and administrators to the broader community of pension plan stakeholders. Such risk transfers are inappropriate, and unfairly penalize sponsors and members of prudently managed pension plans.

Canada's life and health insurance companies oppose the development of purely reactive pension benefit guarantee funds.

Canada's life and health insurance companies favour the proactive development of responsible pension governance mechanisms and oppose the development of purely reactive pension benefit guarantee funds.

III. Other Defined Benefit Pension Plan Funding Issues

For most Canadians, income security in retirement flows from job security today.

Defined benefit pension plans, together with other forms of employer-sponsored pension plans, private savings and public pensions, comprise one of two fundamental aspects of a broader government objective of income security. While these arrangements relate to income security after retirement, a corresponding but generally more immediate aspect of income security for many Canadians is the ability to earn income in the years leading up to retirement.

III.1 Balancing Benefit Security and Employment Security

Benefit security and sound plan funding are fundamental principles in the current legislative framework for defined benefit pension plans.

A necessary balance must exist between the security of future income plans and the security of current income.

Canada's life and health insurance companies recognize the legislative objective of protecting future income security through employer-sponsored pension plans. At the same time, the industry recognizes that a necessary balance must exist between the security of future income plans and the security of current income. In that respect, the industry is concerned that efforts to protect the viability of future income plans may actually endanger the current income needs of workers and their dependants.

For some employers, particularly those in industries with high labour costs, the costs of creating and maintaining a defined benefit pension plan can produce significant challenges to continued profitability. In some cases, such costs may be addressed by exporting production to lower-cost jurisdictions. For others, competitive pressure may result in a redesign or elimination of employment benefits programs. In either case, the investment risks associated with saving for retirement may be transferred to individual employees.

Funding shortfalls should be reconciled with the liabilities of the plan on a gradual basis.

Where employers are unable to restructure benefit programs and must continue to fund defined benefit pension plans, that funding requirement can impose considerable economic strain on the sponsoring organization. This strain is recognized in various aspects of the consultation paper, notably in the recognition that where inadequate assets result from funding insufficiencies, less-than-anticipated investment yields or other impairments of assets, such shortfalls should be reconciled with the liabilities of the plan on a gradual basis.

The cost of securing future pension benefits must be balanced against the cost of sustaining current member employment and the viability of plan sponsors.

In order to avoid such circumstances occurring and to protect both current and future income goals of Canadian workers and their dependants, the industry urges the Department of Finance to acknowledge that an appropriate cost balance should be maintained between the security of future pension benefits and the current sustainability of members' employment and the viability of plan sponsors.

III.2 Harmonization and Simplification

Different pension rules in different jurisdictions represent substantial ongoing challenges for plan sponsors, members and their beneficiaries, and for service providers.

In earlier consultations relating to the development of a model pension law, the Canadian Association of Pension Supervisory Authorities has identified regional variations in legislation and regulation of pension plans as a significant challenge to the cost-effective and efficient administration of multi-jurisdictional plans. Canada's life and health insurance companies agree that jurisdictional variations in the rules pertaining to pensions represent a substantial ongoing challenge for plan sponsors, members and their beneficiaries, and for service providers.

Consistent pension rules are desirable for each of these constituencies. The industry therefore supports the broad intent of CAPSA's efforts to develop a common approach to pension legislation and regulation throughout Canada.

At the same time, the industry recognizes that consistent principles do not guarantee consistent legislation, regulation or interpretation, and that specific regional circumstances and concerns may give rise to well-intentioned variances from national norms. From the industry's perspective as service providers, it is not always clear that such variances serve public policy goals effectively, or that they help realize the shared objectives of pension plan regulators, sponsors, members, and other plan beneficiaries.

Consultations with pension regulators and stakeholders should continue in order to facilitate harmonization and simplification.

Thus, Canada's life and health insurance industry urges that consultations with pension regulators and stakeholders throughout Canada should continue in order to facilitate the on-going harmonization and simplification of pension regimes and the development of cost-effective and consistent pension law and regulations, applicable throughout Canada.

III.3 Flexible Valuation Standards

The determination of the adequacy of pension plan assets relative to projected liabilities is an ongoing obligation of the pension plan administrator, subject to monitoring and supervision. In order to ensure that such determinations are objective, they are normally undertaken by actuarial consultants not associated with the sponsoring employer(s), operating under the applicable standards of practice of the Canadian Institute of Actuaries in accordance with the standards prescribed by relevant pension legislation and regulation.

Any revision to applicable legislation, regulation or governing standards may have an impact on the valuation of plan assets and liabilities. For instance, adoption of more flexible permitted funding methodologies may require the adoption of specific standards to value any resultant change in funding practices.

Pension regulators should continue consultation on valuation standards with the Canadian Institute of Actuaries.

The industry urges that further consultation occur between the regulatory community and the Canadian Institute of Actuaries in order to develop valuation standards that better reflect the timing of particular liabilities and the volatility of investment markets.

III.4 Consistent Valuation Standards

In recognition of the evolving nature and complexity of determining appropriate valuations of both pension plan liabilities and assets, a revised Standard of Practice for Reporting on Pension Plan Funding is currently being developed by the Canadian Institute of Actuaries.

The framework within which actuarial standards of practices apply must be established by pension regulators.

At the same time, Canada's life and health insurance companies recognize that the framework within which such standards of practices are applied must be established by the relevant legislators and pension regulators. That is, the valuation of defined benefit pension plan assets and liabilities should be performed in accordance with principles established on a co-operative basis by all pension regulators throughout Canada and must reflect any applicable Standards of Practice developed by the Canadian Institute of Actuaries.

The industry therefore urges the Department of Finance to work with other regulators of pensions in Canada and the Canadian Institute of Actuaries to develop consistent standards for the valuation of pension plan assets and liabilities.

III.5 Contribution Holidays

Quebec's Régie des rentes has suggested that contribution holidays be limited to the year immediately following a plan's actuarial valuation. Similarly, the Association of Canadian Pension Management holds the view that, until the funding target of the pension plan is met, neither contribution holidays should be permitted nor should surplus assets be used to reduce additional contributions required for funding pension benefits.

Contribution holidays should be limited to the year following an actuarial valuation or comparable review of the financial status of the plan.

Canada's life and health insurance companies agree that this would appear to be a prudent course of action, and that contribution holidays should be limited to the year following an actuarial valuation or comparable review of the plans financial status.

III.6 Preserving Regulatory Efficiency

Because of the variability in scale and duration of benefits promised under defined benefit pension plans, as well as the potential volatility in investment returns within such plans, monitoring funding and valuation of such plans requires a significant commitment on the part of sponsors, service providers and regulators. By contrast, defined contribution plans provide a relatively streamlined and low cost administrative and compliance model.

Because of the fundamentally different nature of the obligations assumed by these two classes of pension plans, the regulation of each type of plan is necessarily tailored to the risks associated with that specific class. As such, it would be inappropriate to generalize all rules applicable to defined benefit pension plans and assume that they should or can apply equally to defined contribution pension plans.

Defined benefit pension plan rules should not interfere with the efficient regulation and operation of defined contribution plans.

Canada's life and health insurance companies encourage all legislators and pension regulators to respect the distinctive simplicity, transparency and existing accountability of defined contribution pension plans. Legislation and regulation intended to address defined benefit pension plan rules should not interfere with the efficient regulation and operation of defined contribution plans.

IV. Conclusions

In order to encourage the continued viability of defined benefit pension plans, Canada's life and health insurance companies suggest that:

  • Consultation with pension regulators and stakeholders throughout Canada should continue in order to facilitate the on-going harmonization and simplification of pension regimes and the development of a cost-effective compliance model for all pension plans,
  • More accountable and flexible mechanisms for plan funding and valuation are needed,
  • The development and disclosure of formalized funding strategies and practices is a means of better addressing concerns of plan members regarding the security and stability of future benefits,
  • A prudent approach to pension investment and funding practices should be adopted, coupled with proactive, on-going, evaluation of the relative level of plan assets and liabilities, rather than relying on a reactive, public, pension guarantee fund,
  • Dispute settlement mechanisms related to surplus can be enhanced via more transparent accounting of sponsor and member contributions,
  • An appropriate cost balance should be maintained between the security of future pension benefits with the current sustainability of members' employment and the viability of plan sponsors, and
  • An efficient regulatory regime for defined contribution pensions plans should be preserved.

The industry greatly appreciates this opportunity to contribute to the Department of Finance's consultations and stands ready to make available any further information which the Department of Finance may require.

Annex A – The Life and Health Insurance Industry in Canada's Economy

The Canadian Life and Health Insurance Association Inc. (CLHIA) represents an industry that:

  • is highly competitive.
  • Within Canada, 108 life and health insurers compete aggressively with each other. Standard and Poor's has described it as "tooth and nail" competition. Canadian-controlled firms have about 75 per cent of the Canadian market.
  • provides a wide range of financial security products to about 23 million Canadians and their dependants.
  • These products include individual and group life insurance, individual and group annuities (including RRSPs, RRIFs and pensions), as well as supplementary health insurance.
  • pays out $44 billion a year in benefits, or $842 million a week.
  • Of this total, about 90 per cent goes to living policyholders as annuity or disability benefits, reimbursement of health care costs, dividends, cash surrender values and matured endowments. The remaining 10 per cent goes to beneficiaries as death claims.
  • is internationally successful.
  • In more than 20 countries around the world, Canadian life and health insurers have an outstanding track record of competing in foreign markets, with 54 per cent of worldwide premiums generated abroad.
  • is a major investor in Canada's economy
  • with assets in Canada of almost $315 billion at the end of 2003.
  • is a significant contributor to public finances in Canada.
  • In 2002, the industry paid over $2 billion in taxes, with over $825 million going to the federal government. One undesirable feature of these taxes is that, to a large extent, they are payable whether or not the insurer makes a profit. In addition, the industry collects and remits retail sales tax payable by policyholders on group insurance premiums in Quebec and Ontario, which amounted to over $1 billion in 2002.
  • is a major employer.
  • In total, about 118,000 Canadians earn some or all of their living from the industry. More than 52,900 people work full time for life and health insurance companies in Canada. In addition, 65,100 independent insurance agents earn at least part of their income from the life and health insurance business.
  • contributes to small business.
  • The products of life and health insurers and the consultative role of life insurance agents are useful factors in helping small and medium-sized businesses attract and retain a skilled workforce.
  • has operated, for over 30 years, the Consumer Assistance Centre which has handled more than 1,115,000 calls since inception, providing assistance to Canadians from across the country in both English and French, primarily through toll-free telephone lines. The Centre handles an average of 60,000 calls a year, more than 90 per cent from consumers seeking:
  • information

about industry practices, life and health insurance companies and their products,

  • publications
  • about the industry's products and services,
  • policy search assistance
  • in locating lost policies of a recently deceased family member,
  • information on restitution for Holocaust victims and their heirs, and
  • informationabout CompCorp, which administers the industry's consumer protection plan.
  • has established an independent OmbudService for consumers
  • of life and health insurance products called the Canadian Life and Health Insurance OmbudService (CLHIO), as part of the Financial Services OmbudsNetwork, an integrated industry-based system of recourse for consumers of financial services.