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Association of Canadian Pension Management's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:
October 25, 2005
Ms. Diane Lafleur
Financial Sector Policy Branch
Department of Finance
20th Floor, East Tower
140 O'Connor Street
Dear Ms. Lafleur,
Re: Response to Consultation Paper – Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the Pension Benefits Standards Act, 1985
Thank you for the opportunity to respond to the Department of Finance's consultation paper on the funding of federally regulated defined benefit plans. In addition, thank you for granting the extension for our response to your paper.
The Association of Canadian Pension Management (ACPM) represents private and public sector pension plan sponsors, administrators and related stakeholders. The ACPM's 700 members across Canada represent plans with total assets of $300 billion and over three million plan members.
The ACPM's mission is to promote the health and growth of Canada's retirement income system by championing the following principles:
- Clarity in pension legislation, regulation and arrangements;
- Good governance and administration; and
- Balanced consideration of stakeholder interests.
The ACPM is pleased that the Department of Finance is seeking the views of pension industry stakeholders on the important issues raised by the Consultation Paper.
Asymmetry is a central issue relating to the funding of most Defined Benefit (DB) plans in Canada. All of the solutions provided in our response to the Dept. of Finance's Consultation Paper are predicated on the resolution of the asymmetry issue. The ACPM believes that the resolution of the asymmetry issue is necessary to improve the environment for existing DB Plans and ensure the establishment of these types of plans in the future.
The ACPM recently released a funding paper entitled Back from the Brink: Securing the Future of Defined Benefit Pension Plans. Many of the questions posed in the Dept. of Finance's paper are addressed in our funding paper. We have attached a copy for your reference. Where appropriate, we will direct you to the section of our funding paper that addresses a specific question.
Issues For Discussion
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.
There are several factors that lead to minimal funding strategies for defined benefit plans. Please refer to pages 1, 2, 3, 9, 10 and 11 of the ACPM Funding Paper.
The Government of Canada is seeking views on whether the dispute settlement mechanism for surplus distribution contained in the PBSA requires improvement or clarification.
One of the themes that is constant throughout the ACPM Funding Paper is the requirement for clarity. With respect to the dispute resolution settlement mechanism for surplus distribution, the ACPM feels that the consent level should be applied to all plan beneficiaries as a group rather than separately to each category of beneficiaries. The positive consent model is not the only model that could be used. The Government of Canada should consider using a model in which a proposal is deemed to be accepted unless a specified percentage of members object to the proposal, such as that used in Quebec. This model has the advantage of being simpler to administer and has proven to be efficient. An improvement in the dispute settlement mechanism for surplus distribution would not create, by itself, a material incentive for plan sponsors to fund more than the minimum requirements as it does not recognize the nature of the "deal" between the plan members and the plan sponsor. Of course, an overriding consideration should be given to uniformity among Canadian jurisdictions on the consent process.
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.
The ACPM has gone on record opposing partial plan wind-ups, most recently in a list of recommendations to the Minister of Finance of Ontario concerning the repercussions from the Monsanto decision. We have included a copy of these recommendations for your information. We would also note that Quebec has eliminated the concept of partial termination from its pension legislation since January 1, 2001; all stakeholders in Quebec seem satisfied with the results of this progressive change.
The Government of Canada is seeking views on whether there are alternative financial vehicles, such as letters of credit, that could allow for greater funding flexibility.
What types of conditions or rules should be required if greater funding flexibility is given to plan sponsors, to ensure that the risk to benefit security is minimized?
Please refer to pages 11, 18, 19 and Attachment 1 of the ACPM Funding Paper for a discussion around the use of Letters of Credit. Changes to the Income Tax Act (Canada) may be required to allow alternative financial vehicles.
Allowing the use of Letters of Credit should not be seen as a replacement to resolving asymmetry issues, since there are a number of practical considerations (fees, governance, impact on credit line, etc.) that make their use unappealing for many plan sponsors. Letters of Credit do not represent an affordable option for many sponsors. Therefore it would not be appropriate for pension regulators to impose higher funding of pension plans on the basis that the use of letters of credit is allowed.
The Government of Canada is seeking views on what the appropriate amortization period is and whether it is different for financially vulnerable and financially strong companies.
The Government of Canada is seeking views on what type of conditions or rules should be attached to any extended amortization period for solvency funding for companies under CCAA or BIA.
Please refer to pages 14, 15 and 23 of the ACPM's Funding Paper. The ACPM supports extending the amortization period for financially strong companies.
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?
Please refer to pages 11 through 24 and page 26 (item a.2) of the ACPM Funding Paper. The ACPM supports special accounts for solvency funding requirements. This should be in addition to any extension of the amortization period.
The Government of Canada is seeking views on whether there should be greater disclosure provided to plan members regarding plan sponsor's financial condition, funding decisions and contribution holidays and how this may be done.
The ACPM encourages disclosure so that plan members have a better understanding of their benefits, the pension deal, the plan's financial position and the risk. However such additional information should not result in unreasonable administrative expenses. The use of existing communication vehicles (e.g. annual pension statements) is preferable.
C. 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 per cent, and to reduce the priority of claims against pension plan assets for recent benefit improvements that have not been fully funded. Specifically:
Is an 85 per cent solvency ratio an appropriate threshold for applying the proposed controls and conditions on plan improvements?
Should pension plans with solvency ratios below 85 per cent be permitted to make plan improvements provided that offsetting funding is provided at the time that the improvement comes into effect?
Would the proposed priority scheme improve security of longer-established benefits?
Please refer to pages 22 and 23 of the ACPM Funding Paper.
Pension plans should be permitted to make plan improvements provided that offsetting funding is provided at the time that the improvement comes into effect to maintain the plan's solvency ratio at the applicable threshold.
D. Full Funding on Plan Termination
The Government of Canada is seeking views on full funding on plan termination, and in particular how it should be applied to financially vulnerable sponsors.
Please refer to page 24 of the ACPM Funding Paper.
The requirement of full funding should not be applied differently for financially vulnerable plan sponsors, in most situations. However, there may be circumstances where a modified requirement would enhance the security of the plan members' pension benefits.
It should also be clear that negotiated contribution defined benefit plans (i.e. most MEPPs) are exempt from the requirement for full funding on plan termination.
E. Pension Benefit Guarantee Fund
The Government of Canada is seeking views on the viability of a federal pension guarantee fund including any comments on its possible design, operation and powers.
The ACPM believes that pension guarantee funds do not work very well, nor do we support their expansion. Please refer to page 21 and 22 of the ACPM Funding Paper for further information about our views.
We would be pleased to discuss our comments with you in more detail.
Chair, Advocacy and Government Relations Committee
Association of Canadian Pension Management