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Air Line Pilots Association International Canada's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:
Air Line Pilots Association International Canada
155 Queen Street
Fax (613) 569-5681
September 23, 2005
Ms. Diane Lafleur
Financial Sector Policy Branch
Department of Finance
20th Floor, East Tower
140 O'Connor Street
By Fax: 613-943-8436
RE: Consultation Paper Entitled "Strengthening the Legislative and Regulatory Framework for Defined Benefit Plans Registered under the Pension Benefits Standards Act, 1985"
Dear Ms. Lafleur:
The Air Line Pilots Association, International (ALPA) represents more than 64,000 professional pilots who fly for 41 airlines in Canada and the United States. Both as our members' certified bargaining agent and as their representative in all areas affecting their safety and professional well-being, ALPA is the principal spokesperson for airline pilots in North America. ALPA therefore has a significant interest in improving the legislative and regulatory framework for defined benefit pension plans.
On behalf of the ALPA Canada Board, we are responding to your request for views on the consultation paper entitled "Strengthening the Legislative and Regulatory Framework for Defined Benefit Plans Registered under the Pension Benefits Standards Act, 1985" (PBSA). We support your department's initiative to look for ways to strengthen our federal defined benefit pension system and appreciate the opportunity to offer our comments. Below we show each of the paper's comments or questions on which it requests stakeholder views, followed by our comments.
A. Issue for Discussion – Surplus
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.
We believe that the current tax-deferred contribution limits and the question of surplus ownership are substantial disincentives for plan sponsors to adequately fund their pension plans.
Future plan viability and plan solvency is enhanced with additional contributions. Funding above minimum required levels improves plan stability over business cycles and helps build a cushion during periods of adverse investment returns. However, tax rules generally limit pension plans to hold surplus assets equal to 10% of going-concern liabilities, or 2 times current service cost up to 20% of liabilities if greater. If the surplus exceeds this level, contributions must be suspended.
Although we recognize contribution limits are needed to limit the federal tax revenue lost on the tax deferred contributions, we believe the current limits are too restrictive. We believe that defined benefit pensions are an integral portion of a member's retirement income and that rules that encourage additional funding that strengthens their security provide substantial benefits to the economy that outweigh an increase in the amount of tax deferred contributions. Increasing the surplus asset limit to 50% of going-concern liabilities or 5 times current service cost up to 50% of liabilities would provide plan sponsors funding flexibility to put more contributions into the plan during profitable business periods. If an employer takes advantage of less restrictive funding limits, they will have flexibility to lower contribution levels during a down business cycle, while still maintaining a surplus.
Even if contribution limits are increased, plan sponsors may not take advantage of the change because of the question of ownership of the additional surplus created. Therefore, we would support defining the plan sponsor as the owner of any surplus created by contributions that were both above minimum required levels and above any collectively-bargained contribution amounts.
The Government of Canada is seeking views on whether the dispute settlement mechanism for surplus distribution contained in the PBSA requires improvement or clarification.
A surplus dispute settlement mechanism was added to the Pension Benefits Standards Act in 1998. If an employer can demonstrate its entitlement to the surplus, the employer could withdraw all or part of the surplus if it obtained the consent of the Superintendent of Financial Institutions and met all regulatory requirements. If an employer cannot demonstrate entitlement, it could get access to the surplus if it submitted a proposal supported by (1) at least two-thirds of plan members and (2) at least two-thirds of former members of the plan and any others entitled to benefits. If the employer does not receive two-thirds support, but does receive more than half support from each group, the employer can submit its proposal to arbitration. As the federal government believes this mechanism is currently working well and we are not aware of any situations to the contrary, we support keeping the current dispute settlement mechanism.
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.
ALPA believes there should not be partial plan terminations under the PBSA. We support the Quebec Supplemental Pension Plan Act that in such situations requires immediate vesting of pension benefits for all plan members. This ensures that in partial terminations all plan members are treated equally, since the PBSA requires affected members be fully vested.
If the regulations do allow partial plan terminations, we believe that no surplus should be distributed at the time of the partial termination. ALPA disagrees with the decision in Monsanto Canada Inc. v. Ontario. This case involved interpreting Ontario's Pension Benefits Act regarding participant rights when they are affected by a partial wind up of a plan. Basically, the Court concluded that if plan members would be entitled to a surplus distribution in a full plan wind up, then a pro-rata share of surplus must be distributed to members affected by the partial wind up. ALPA agrees with the prevailing view that surplus is a "notional amount" subject to actuarial assumptions and plan experience that will lead to actuarial surpluses (or deficits) of varying amounts at different times. Removing part of the surplus could also affect the ability of the plan sponsor to meet future pension obligations. If the plan is ever fully terminated, the members affected by the partial termination should receive their share of a surplus distribution at that time.
B. Issue for Discussion – Funding
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 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?
ALPA is not in favour of allowing letters of credit to be recognized as pension assets. Such a letter of credit would have to deal with a myriad of terms and conditions regarding its use, such as the financial condition of the employer, limits on amount of letter of credit as a percentage of total plan assets, length of time the letter is in effect, and possibly permitting the letter to be withdrawn under certain funding conditions. We believe the many terms and conditions that would have to accompany such a letter of credit outweigh its possible benefits to the plan sponsor.
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. They also seek 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.
ALPA generally supports the extension of the solvency deficit amortization period to 10 years, as approved in 2003 for Air Canada under the Companies Creditors Arrangement Act. For an employer in serious financial difficulty, extending the solvency deficit payout period can reduce the annual contributions enough to allow the employer to emerge from bankruptcy protection. While there is additional risk to plan members' benefit security, we believe it is worthwhile to help the company through its economic downturn so the business remains viable well into the future. However, instead of writing complex legislation that attempts to frame the rules to fit every employer that wants to extend it amortization period, we believe it is better to provide a general regulatory framework and require the Superintendent of Financial Institutions to review and give final approval to each application.
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?
We previously stated our objection to permitting letters of credit in lieu of actual contributions. However, we recognize that an employer may be contributing large amounts to the plan to satisfy solvency deficits, and once these deficits are eliminated a solvency surplus could emerge. For example, if interest rates increase and asset markets rebound, many plans that have fully or partially paid their current solvency deficits could suddenly realize a surplus.
For plans that have made solvency deficit payments but eventually have a surplus at plan termination, we support returning to the employer any solvency payments in excess of the amounts needed to pay promised benefits. We would also support separately tracking solvency contributions in excess of minimum requirements and collectively-bargained levels, and returning these amounts to the employer if sufficient surpluses are generated and the amounts are deemed no longer necessary to fund the plan.
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.
The PBSA requires annual disclosure to members outlining member contributions, accrued benefits, plan solvency ratio and other prescribed information. In addition, the PBSA requires notification of plan amendments to members within six months of the effective date.
ALPA believes a plan member should know details about the plan's funding status in addition to the solvency ratio. A plan member should know a plan's assets and liabilities on both a going-concern and solvency basis. The current service cost and annual benefit payments for recent years should be disclosed so the member can see the annual distributions required to pay benefits and keep up with new pension accruals, and how that relates to the current asset/liability surplus or deficit. Although some of this information is available by examining the regulatory information filed with the OSFI, we believe this information should be included with the annual disclosure as very few members have the time or inclination to obtain it elsewhere.
We believe a plan sponsor should be required to adopt a funding policy that must be disclosed to members. However, regardless of whether or not this provision is adopted, we recommend a 10-year historical table of the actual plan contributions compared to the required minimum amount and the maximum tax deferred amount available during each of those years be made available to members in the annual statement. This would illustrate the employer's funding decisions over several business cycles.
C. Issue for Discussion – Void Amendments
The Government of Canada is seeking views on its proposal to implement the void amendments of the PBSA based on a prescribed solvency ratio level of 85%, and to reduce the priority claims against pension plan assets for recent benefit improvements that have not been fully funded. Specifically,
(a) Is an 85% solvency ratio an appropriate threshold for applying the proposed controls and conditions on plan improvements?
Current regulations do not restrict plan amendments in any way, even if a pension plan is substantially underfunded. In 1998, a provision was added to the PBSA that would void plan amendments that reduce a plan's solvency ratio below a prescribed level. Consultations were conducted prior to this provision being added in 1998, and again in 2000, but at this time no regulations implementing the provision have been adopted. We support limiting the ability of a plan sponsor to adopt plan improvements when the solvency ratio is below 85%.
(b) Should pension plans with solvency ratios below 85% be permitted to make plan improvements provided that offsetting funding is provided at the time that the improvement comes into effect?
Yes, we support the availability of plan improvements if the employer can provide offsetting funding to maintain at least the 85% funded ratio. The fact that the solvency ratio has dropped below 85% may not be a reflection of the employer's health, but a result of a low interest rate environment and recent poor asset performance, as we have recently seen. Therefore, if a financially viable employer has the cash on hand to increase contributions to maintain the minimum acceptable solvency funded ratio, they should be permitted to implement a plan improvement.
(c) Would the proposed priority scheme improve security of longer-established benefits?
We agree that if plan improvements adopted within five years of a plan termination are given lower priority in bankruptcy, it would improve security of other plan benefits. When the new plan provision goes into effect, it will be recognized in the actuarial valuation and will begin to get funded. So if this plan change is not given a priority claim at termination, those contributions that started to fund the recent improvements will now be available for other plan benefits, thus improving the security of the other benefits.
D. Issue for Discussion – 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.
Currently if a plan is terminated, the plan sponsor is only required to pay any outstanding payments to the plan, such as employee contributions that have been deducted from employee pay but have not yet been paid into the plan, or employer contributions owed but not yet remitted. We support a change that would require an employer to fully fund the promised benefits in the event of a plan termination.
We recognize that for financially vulnerable plan sponsors, the obligation to make up a funding shortfall on plan termination could impact the ability of the sponsor to secure financing. However, we believe the plan sponsor should apply to the Superintendent of Financial Institutions for an extension of the period over which any shortfall must be paid, or work out other relief with the government, rather than terminate an underfunded plan causing the members to lose promised benefits.
F. Issue for Discussion – 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.
Ontario is currently the only jurisdiction in Canada to have a pension benefit guarantee fund (PBGF). Such a fund would provide pension benefits to employees, retirees and beneficiaries if an employer becomes bankrupt or insolvent and its pension plan is underfunded. Some believe a PBGF helps prevent employees from leaving companies in financial difficulty. While we always want members to receive 100% of their promised benefits, we do not support creating a federal PBGF.
We feel the many issues related to a PBGF outweigh its potential benefit to plan members. A PBGF could provide a disincentive for employers in financial difficulty to properly fund their pension plans and manage their promised benefit levels. It may also be difficult to adequately spread the insurance risk for a federal PBGF because only 10% of all plans are registered federally and 10 of those plans account for about 63% of the assets. In addition, plan costs would increase because of a required premium payment to the PBGF. Would the premium cover all promised benefits or only benefits below a set level? There is a risk the increased cost could further push plan sponsors to defined contribution plans. There is also risk the PBGF may not be able to cover its pension liabilities, which could lead to pressure for government funding, thus creating issues for the economy and governmental policy. We are seeing many of these issues unfolding currently in the United States.
We support federal regulators annually reviewing the funded status of the defined benefit plans, monitoring the contributions of plan sponsors with plans with solvency deficits, and working out amortization period extensions or other means for an employer to remain viable and maintain the plan during a period of serious economic hardship.
On behalf of the ALPA Canada Board, we thank you for the opportunity to comment on the consultation paper.
Original signed by
Captain Kent Hardisty
President, Canada Board
Air Line Pilots Association, International