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Bell Pensioners' Group Inc.'s Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:
Bell Pensioners' Group Inc.
Response to Request for Comments Regarding the Consultation Paper Issued May 2005 by Finance Sector Division Department of Finance Canada
"Strengthening the Legislative and Regulatory Framework For Defined Benefit Pension Plans Registered Under the Pension Benefits Standards Act, 1985"
The Bell Pensioners Group Inc. (BPG) was formed 10 years ago and currently has over 8,000 active members. One of its roles is to provide advocacy services to retirees who receive pension benefits from a specific federally registered private defined benefit pension plan.
The commentary below is solely that of the BPG organization. It is offered in the spirit of helping to improve the legislative and regulatory framework for all defined benefit pension plans in Canada.
Re: Consultation Paper CONTEXT Section
- Why do retirees want a say in the discussions on the need to update laws and regulations that impact on defined benefit pension plans? In the past very few retirees gave any thought to the potential impacts on them should their pension plan get into financial difficulty and possibly have to be terminated with insufficient funds to pay them their full pension benefits.
- But times have changed in recent years and retirees have since started to become much more concerned about the security of their pension plan benefits. They are being inundated frequently with articles in the newspapers and stories on television about businesses that are struggling financially or have collapsed along with their associated pension plans. It hits home even more if a retiree knows of a friend or relative who works for or is retired from one of these businesses.
- All this has given rise to new concerns for retirees. They recognize a need to be represented in a forum where they can voice these concerns and get answers and action. Retirees should be afforded the same level of recognition as all the other current pension plan stakeholders.
- The recent survey issued in June by the federal Office of the Supervisor of Financial Institutions, 'Public Confidence in Financial Institutions', observed that defined benefit plan members "express high levels of confidence that their plans will be able to pay entitled benefits in retirement". This may suggest that active plan members don't have the information needed or are unable to interpret the information they've been given regarding the current and long term financial health of their pension plans.
- On the other hand one only needs to compare that survey with the results of a survey of chief financial officers released in April 2005 by the Conference Board of Canada. When asked the question, "Is there a Pension Crisis?" 43% responded that they believe there is a widespread problem beyond the next few years. This is not a high vote of confidence coming from an informed group of professionals and does little to make retirees feel more comfortable or confident that their pension benefits are secure.
Re: ISSUES FOR DISCUSSION Section
- Very few pensioners have backgrounds as actuaries, economists, financial analysts or corporate accountants. The majority would probably prefer not to become deeply knowledgeable about the complexities involved in the administration of pension plans. They therefore must rely on pension laws and regulations to ensure that their interests are properly cared for.
- The single most important issue when it comes to pension plans has to be the security of plan benefits to members, retirees and other beneficiaries. As well, government and others must never forget the role of private pensions as a key pillar in the national retirement income system.
- In order to be considered fully secure, a pension plan has to be fully funded and able at all times to meet its obligations using the actuarial "solvency" and "going-concern" rules. BPG would like to see more rigour attached to these solvency determinations and/or a further solvency test be disclosed that includes all termination costs and expenses. Furthermore, requirements regarding post termination retirement benefits should recognize that these benefits must be at least equivalent to the full benefit entitlements specified in the plan.
- One means to an end to ensure the security of all pension plans is to consider the regulations in The Netherlands regarding minimum solvency requirements. There, pension plans must be solvent at all times; plan amendments must be funded immediately; there must be immediate disclosure of poor yields on investment; and so on. But perhaps the most important requirement in their pension law is that a pension plan must always be able to meet the criteria needed for reinsuring its liabilities with an insurance company.
- BPG is of the opinion that the adoption in this country of full pension plan solvency at all times would significantly reduce the level of current concerns over the accounting for pension plans in the sponsors' financial reporting.
The following is in response to the specific requests for comments as contained in the Department of Finance Canada consultation paper.
Are there any disincentives or obstacles preventing plan sponsors from adequately funding their plans and building up a funding cushion?
- "Surplus" is not the best term for what is being discussed in this section except when it is used to describe the assets remaining after a pension plan is fully wound-up.
- A "funding cushion" is more aptly described as a "reserve". See our comments on page five regarding alternatives to addressing funding issues.
- Each plan must have its own consideration when it comes to determining how much reserve funding is required. The income tax regulations would have to be changed to recognize the reserve funding parameters set by each plan's actuaries.
- The ability to take a "contribution holiday" even if a pension plan is not fully funded creates the wrong impression that pension plan funding is a not a top priority. There needs to be more emphasis placed on the necessity to have pension plans fully funded and solvent and that anything less shouldn't be considered as an acceptable business practice.
- The same business and legal environment that view, for example, the paying of employees in full and on time or the remittance of payroll tax deductions in full and on time as being critical requirements, should also apply for pension plan funding commitments.
Does the dispute settlement mechanism for surplus distribution contained in the PBSA require improvement or clarification?
All pension plans need to have clear and unambiguous wording on ownership of pension surplus both now and going forward for new plans. Existing plans lacking in this area should be required to amend their plan details to add this provision within a specified period of time. The regulatory rules already in place for dispute resolution on the disposition of a pension surplus could be applied here as well where required.
If all pension plans were brought into line in this regards now, it would eliminate disputes later on which can be very distressing and fractious for all parties, expensive to pursue, and resolution can be a very lengthy process. Settling the issues upfront might still be challenging in some cases but likely much less so than waiting to do it in a crisis situation.
Should partial plan terminations be allowed under the PBSA, and if so, should there be a requirement to distribute surplus at the time of the partial termination?
It is time to bite the bullet and mandate immediate vesting (after three months of employment service) and eliminate the provision for partial termination.
Are there alternative financial vehicles, such as letters of credit, that could be used 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 if minimized?
The rules introduced in The Netherlands requiring continuous plan solvency allowed for an initial 10 year transition period. Implementing these requirements in Canada would require plan sponsors to review and enhance their corporate governance in the areas of pension plan administration and finance. Compliance with new regulations should require that each plan have a formal funding policy and a funding plan.
If the above requirements were followed and if there are appropriate allowances in law and regulations regarding surpluses (or reserves), it would facilitate more responsible and stable funding. There could be circumstances where the use of financial instruments such as short and medium term letters of credit is warranted. This would be acceptable as long as they could be issued within the context of successfully meeting the criteria to be able to fully reinsure the plan liabilities.
What is the appropriate amortization period for solvency funding and should it be different for financially vulnerable versus financially strong companies? What types of rules should be attached to any extended amortization period for solvency funding for companies under CCAA or BIA?
Regardless of what rules and regulations are in place there will always likely be a need for something akin to a disaster plan embedded in regulations. The chief problem is how to assess the ability of a plan sponsor to re-establish full solvency for a pension plan once it is seriously in arrears.
There is no evidence to suggest a slow down anytime soon regarding the radical shifts in the commercial and retail market place, the effects of increasing global competition, the pace of technological change, and so on. These conditions make it increasingly difficult to determine the financial viability of many pension plan sponsors five or ten years down the road. And if the sponsor is struggling financially, there is currently too little in the way of regulationsand incentives to ensure that full pension plan funding receives the appropriate high priority.
If a sponsor has a formal pension plan investment policy and a long term funding plan that ensures full solvency at all times, there would a better chance of the sponsor being able to protect the plan should there ever be an unforeseeable financial misfortune event.
But, for when the unforeseeable does happen, a process needs to be in place to allow for the regulator to decide quickly the need to assemble a panel of experts (from inside and outside the government) to help the plan sponsor or court-appointed administrator develop a custom-tailored plan for recovery or mitigation.
A financially healthy sponsor with a solvent pension plan funded under the current guidelines likely doesn't require a five or ten year window in order to meet the full continuous solvency criteria. For the transition period before new regulations have to be met, each sponsor should be required to submit a funding plan which would identify a specific transition period. An upper limit of five years might be appropriate beyond which the regulator would need to approve the transition period on a case by case basis.
Are there alternatives to addressing funding issues other than relaxing funding requirements? For example, would special accounts for pension plans be feasible?
A better question may be to ask how to minimize the risk of there ever being funding deficiencies. One way would be to require each plan to establish, maintain, and account for separately, an auxiliary pension reserve fund.
- Actuaries would determine, at least once a year, a range for the amount of reserve to be maintained for the purpose of: assisting the funding requirements during poor economic times and during periods of low returns on investments; funding of plan amendments, etc.
- The main pension fund might generate a surplus of assets in some years which would be transferred to the reserve fund. The reserve fund would transfer assets to the main fund as required in order to assist the pension plan to be fully solvent at all times. Sponsors will contribute as required to both the main pension fund and the reserve fund.
- Periodically the actuaries may determine that the reserve fund has an excess of assets. Regulations governing disposition of excess assets will be required and will have to take into consideration the rules of the pension plan as well as tax authority regulations.
By allowing sponsors to contribute in this way to a reserve fund during the good times, it will make it easier for them to sustain full pension plan solvency when their business cycle is at the bottom and/or in times of poor returns on financial investment. This is a win-win solution for the sponsor, for the pension plan, and for its members and beneficiaries.
Should there be greater disclosure provided to plan members regarding a plan sponsor's financial condition, funding decisions and contributions and how should this be done?
Some plan sponsors take their annual reporting to members and retirees seriously and produce excellent annual reports. The better reports not only display the mandated data in a comparative manner to previous periods but go further in assisting the recipients to better understand their pension plan and benefits by including supplementary information, a glossary to explain the terminology used, and more.
There is more basic data which could be disclosed and the suggestions and considerations identified in the consultation paper are all worthy and we recommend they be adopted. BPG offers the following for consideration as well:
- All the information presented in the annual reporting, whether it is to plan members and retirees or the reporting to the regulator, should be independently verified for much the same reasons as to why the plan sponsor's financial reporting data is required to be verified by independent auditors.
- Similar to the financial reports to shareholders and others, the pension information reports to plan members and retirees should include a statement from the sponsor attesting to the accuracy of the information being provided. Copies of these reports should be sent to the regulator and be subject to verification that the information provided agrees with the filings made directly to the regulator by the plan administrator.
- There are filing dates prescribed for the reporting to the regulator and so there should be also be deadlines for reporting to plan members and retirees. It is better that plan sponsors provide pension plan information to members and retirees in a time sensitive manner and definitely before they hear it from the news media.
- Plan administrators should be encouraged to enhance reporting to plan members and retirees by posting reports and information bulletins on dedicated internet or intranet websites, especially for the larger plans. Using this sort of technology allows for information to be disseminated quickly and inexpensively. It also facilitates access to information for non-active plan members.
- Few if any plan members and retirees have seen the full details of their pension plan. It is now possible to give members and retirees access to this information electronically as mentioned above. As well, there may have been practical reasons in the past as to why only some plan amendments were announced to plan members and retirees and why they were not advised in this regard for up to six months after the fact. These situations should be re-addressed now that the information can be made available electronically.
- The only caveat with the last two bullets is that we are in a transition period for retirees during which time there is an ever dwindling number who are not computer literate and/or have no access to the internet. These people should be given the option of identifying themselves to the plan administrator and requesting that they be kept informed through other means.
C. Void Amendments
It is proposed to implement the void amendments of the PBSA based on a prescribed solvency ratio level of 85 per cent, and to reduce the priority of claims against pension plan assets for recent improvements that have not been fully funded.
The desire to implement amendments for improving pension benefits should not be allowed to override prudent financial management of the plan. Amendments could be negotiated and agreed upon but should not be implemented as long as there are any pre-existing funding deficiencies and not until the improvements can fully funded, including any retroactivity.
If a plan is terminated with less than full solvency, existing retirees should have their pension benefits protected as fully as possible as they would be severely limited in their ability to make-up for a loss in benefit entitlements due to age related factors. Where there are insufficient assets to cover the total benefits for this group, a sliding scale should be used in order to ensure that retirees with lower benefits get more consideration regarding income protection.
As for the prioritization of benefit protection for active and non-active plan members, regulations should be established to allow for this and then leave it to each plan sponsor and the respective plan members to agree, in advance while the plan is still active, on what should be incorporated into the details for the plan.
D. Full Funding on Plan Termination
A requirement for full funding on plan termination could lead to financially vulnerable sponsors having difficulty in securing funding. Should this requirement apply when these situations happen?
The likelihood of this situation happening would be negligible if plan sponsors had to ensure full solvency at all times. Given this sort of requirement, you would expect that any solvency deficiency at the time of plan termination would not be large, particularly as plan sponsors wouldn't have been able to take a contribution holiday earlier unless the plan was fully solvent.
E. Pension Benefit Guarantee Fund (PBGF)
The consultation paper has presented more than enough negative factors to conclude that a PBGF would not be viable for federally regulated pension plans.
This is another reason why it is so important that pension plans be kept fully solvent at all times.