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Toronto Board of Trade's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:

Toronto Board of Trade

Response to the consultation on Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans registered under the Pension Benefits Standards Act, 1985

September 2005

Table of Contents




Void Amendments

Full Funding on Plan Termination

Pension Benefit Guarantee Fund



We believe the regulatory and legislative framework governing defined benefit pension plans is working but it does need to be modernized in a number of areas in order to remain relevant in today's business climate. For instance, the current asymmetry of surplus ownership, which is addressed below, has and will continue to have lasting implications for the health of existing defined benefit plans, affecting firms' decisions to continue to invest in those plans or whether to introduce new defined benefit plans.

In addition, the early years of this decade were called a perfect storm for pension plans. Plunging stock markets dragged pension assets down just as declining long-term interest rates boosted plan liabilities. The financial health of Canadian pension plans ended the first quarter of 2005 as weak as at any point in the last few years, according to a pension index released by Mercer Human Resource Consulting. This makes it necessary for governments to introduce new financing tools as well as to add flexibility in funding requirements so plan sponsors can ensure adequate funding.

Our response addresses each of the issues raised in the consultation paper "Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans registered under the Pension Benefits Standards Act" and urges the government to take some important steps to ensure the long term viability of defined benefit pension plans.

In addition, we are concerned about the lack of uniformity and divergent solutions which are being discussed by the Régis des rentes du Quebec and the Financial Services Commission of Ontario, to address similar issues relating to funding of defined benefit pension plans registered in those provinces.

Defined benefit pension plans are an important part of Canada's overall retirement income policy. Without a mix of defined benefit and defined contribution pension plans along with other retirement savings and investment tools we will not have the strong and stable pension and retirement system that is necessary for a strong and vibrant Canada.


Disincentives and obstacles to building up a funding cushion

In our view, there are several disincentives and obstacles that are preventing plan sponsors from adequately funding their pension plans and building up a funding cushion.

Firstly, the lack of clarity surrounding the ownership of any surplus in the majority of pension funds is a strong disincentive for plan sponsors to adequately fund their pension plans. Under the current framework and for the majority of plans, the fund sponsor is solely liable for any deficit in the pension fund; however, the plan sponsor may not be the sole owner of any plan surplus. This asymmetry in the ownership of any fund surplus creates a strong disincentive for plan sponsors to maintain their pension funds in a surplus situation. As such we believe that plan sponsors should be considered the sole owners of any surpluses that may exist in their pension fund just as they are the sole owner of any deficit.

As the consultation paper outlines, some defined benefit plan members argue that pension benefits are deferred compensation, paid as a consequence of contract negotiations that would otherwise have been paid in another form.  In the case of some collective bargaining situations, defined benefits may have attributes of deferred compensation however, it is our contention that any surplus in the fund, above and beyond the previously agreed to benefits, belongs to the plan sponsor and not the plan member.

The second disincentive is the tax rules that only permit pension plans to hold surplus assets equal to at least 10 per cent of going-concern liabilities (or 2 times current service cost up to 20 per cent of liabilities, if greater) before requiring that employer contributions be suspended. These rules unduly limit a plan sponsor from building up surplus to fund longer-term liabilities. This has been amply demonstrated by the current deficits suffered by plans that were so recently forced to take "contribution holidays" because they were deemed to be "over-funded". We urge the government to raise the amount of excess surplus a plan may have before being compelled to take contribution holidays. If the ceiling is raised, many employers may prefer to increase their funding more than is now possible.

Finally, we are currently in an era of low interest rates and relatively low investment returns. This coupled with the Canadian population itself aging – Canada's largest demographic cohort, the baby boom generation, is entering its final decade before retirement – means that concerns about the adequacy of retirement savings and plan solvency will only intensify in the coming years. The situation that was never really expected is upon us, putting greater strains upon defined benefit plan sponsors.

The Dispute Settlement Mechanism for Surplus Distribution

Our members believe that employers own the surplus in the majority of defined benefit pension plans as their agreement with their employees is to pay a specific benefit upon retirement. However, we believe the current dispute settlement mechanism is a reasonable approach, given the current asymmetry, with most disputes being dealt with before having to be moved to the courts for settlement. The Toronto Board of Trade endorses the current dispute settlement mechanism.

Distribution on Partial Termination

Partial termination of defined benefit pension plans should not be legislated under the Pension Benefit Standards Act. Partial termination presents numerous problems when determining a date for the partial wind up. If plan surplus must be dealt with, it is in an employer's interest to attempt to select a date when asset values are low and surplus is minimized. Alternatively, affected plan members or the Superintendent may attempt to impose a date when surplus is high. Issues may also arise as to whether multiple dates or an extended period are appropriate. It can be expected that in many cases, there will be litigation over not only whether a partial wind up should be imposed, but also over which date or dates should be used.

Attribution and allocation of any actuarial surplus are also causes for concern now that the Supreme Court has decreed that surplus must be distributed on the partial wind-up of an Ontario plan. As employers, we are unsure as to how to identify the value of the partial wind up surplus. Often the paper value of a fund will differ from the actual value realized upon the termination of the fund due to changes in market conditions and market values.

Blake Cassels & Graydon LLP in a briefing for clients raised a number of important issues, which illustrate why we believe employers should be considered the owners of any pension surplus similar to how they are the owners of any pension deficit. For instance, if the surplus is to be attributed to the partial wind up group, what if all the people who are affected by the partial wind-up came into the plan after the surplus was created? Could it be argued that none of the surplus should be attributed to them? What if the plan does not require employee contributions? Can we argue that none of the surplus is attributed to them because it is all attributed to the employer's contributions? Can benefit improvements previously funded out of surplus be used to offset the surplus that otherwise should be distributed in connection with a partial wind-up? These are all issues of fact that will have to be determined on a case-by-case basis.

If partial terminations are instituted the government should not require immediate surplus distribution. We do not believe there should be any distribution of the surplus to plan members beyond their previously agreed to benefits. It would be more appropriate, and consistent with the nature of defined benefit pension plans to await a final plan wind up to distribute the surplus then available, rather than allocating surplus to a smaller group when the surplus may be artificially high or low. Any surplus is there to protect all members while the plan is on going.

The Canadian Association of Pension Supervisory Authorities (CAPSA) recently suggested eliminating the idea of partial wind-ups. In its proposed Regulatory Principles for a Model Pension Law, they suggest that as "the principles propose immediate vesting of all benefits, the concept of a partial wind-up is unnecessary." Our members are of the same view and urge the government to eliminate the idea of partial termination.


Letters of Credit

We believe letters of credit (LOC) are good alternative financing vehicles that will give employers greater funding flexibility while maintaining the solvency of their defined benefit pension plans. However, we do believe it is reasonable to set some minimum solvency requirements before an employer is able to use a letter of credit.

At least over the short term, a LOC can be a relatively inexpensive way of covering any potential solvency shortfall and thereby increasing the security of both plan sponsor and members. Due to the real long-term costs of a LOC, it may not be a feasible alternative for securing long term solvency. As a result, we believe that LOCs should not change a plan sponsors commitment to long term cash funding of defined benefit plans.

Alternatives to Relaxing Funding Requirements

We believe there are alternatives the Government could pursue apart from relaxing the funding requirements of defined benefit pension plans.

We support the creation of a notional account for any plan surplus. The account should be clearly segregated from the plan with the plan's sponsor retaining ownership. We believe such an account would bring greater clarity to the ownership of any plan surplus and it will allow the plan sponsor to hold the notional account as a rainy day fund or as a fund to invest in the future of the business and its defined benefit pension plan. We would assume that such an account would be treated in a similar manner to the pension fund.

Disclosure of Funding Information

While we support the idea of full disclosure, we have found that in practice it is not as simple as it sounds. The first problem arises in the differences between public and private companies. Public companies already have a requirement to disclose the financial and actuarial health of their defined benefit pension plans. They must also disclose information around the funding decisions and contribution holidays.

Private and foreign controlled companies have different public disclosure requirements, which makes the disclosure of pension information a sensitive issue. Increased disclosure is something policy makers should aim for; however they must be conscious of the fact that many companies may have legitimate commercial reasons for keeping certain financial and pension information confidential.

Void Amendments

We believe that it would be appropriate to implement the void amendments provisions but we feel that a 90% funding threshold would be more reasonable than 85%. However, plans should be permitted to make improvements if offsetting funding is provided at the time of the improvement.

Full Funding on Plan Termination

Philosophically we believe that the regulations should provide for full funding on plan termination and that all plan sponsors and members have a responsibility to ensure the pension plan is sufficiently funded.

While full funding on plan termination is ideal, it can be problematic in the case of financially vulnerable companies whose plans may not be fully funded and who might not have the resources available to allow for full funding.

Pension Benefit Guarantee Fund

We are strongly of the opinion that a federal pension guarantee fund is not what is needed to strengthen Defined Benefit plans. The experience of both the Ontario PBGF and the United States PBGC has been poor, and this is likely to get even worse in the current low interest, low return environment. No other Canadian jurisdiction has implemented such a fund. It is entirely unreasonable for underfunded plans to be subsidized by either the taxpayer or properly funded plans. Better and more reasonable solvency funding requirements, the elimination of uncertainty as to a plan sponsor's ownership of the surplus and the relaxation of the tax rules limiting the amount of surplus that can be built up as a reserve in good times, present a far superior way forward.


Restricting the ownership and use of surplus by the employer not only leads logically and inevitably to underfunding, but also is a major factor in the movement away from defined benefit pension plans. All other measures to improve and strengthen defined benefit pension plans will fail, if this issue is not satisfactorily addressed.