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TD Bank Financial Group's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:
TD Bank Financial Group Comments On Issues Raised In The Department Of Finance's Paper On The Pension Benefits Standards Act, 1985
Pursuant to a Consultation Paper entitled "Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the PBSA, 1985", the Department of Finance requested input on certain policy issues. TD Bank Financial Group submits the following comments and recommendations:
TD Bank Financial Group recognizes that there is a risk asymmetry in the current defined benefit pension plan system. Following the 2004 Supreme Court of Canada decision in Monsanto which entitled plan members to a distribution of certain surpluses on the partial wind up of defined pension plans under the Ontario's Pension Benefits Act (PBA), plan sponsors now arguably assume a great deal of the downside investment risk of deficit funding without a corresponding benefit when there is a surplus. This risk asymmetry provides a disincentive for sponsors to adequately fund their plans and build up a funding cushion.
We believe that this imbalance between funding risks and rewards should be remedied. We support greater risk symmetry in pension benefit plans, and recommend that the Government pass legislation that would reward sponsors for having a surplus in a defined pension plan. We support OSFI's current interpretation of the PBSA that the rights assigned to persons affected by a partial plan termination do not include the distribution of any surpluses at the time of the partial termination. We recommend that distribution of part of a surplus should not be permitted when there is a partial termination of a pension plan.
Under the current rules, if a solvency valuation reveals a shortfall of plan assets to plan liabilities a sponsor is required to make special equal payments sufficient to eliminate the deficiency potentially over a five year period. In some cases, however, this requirement forces companies to divert essential funds away from general business operations and expansions, and could result in financial stresses for the plan sponsor. What's more, in light of the volatility of some pension plans' liabilities, certain companies may be forced to contribute an amount greater than that needed to eliminate a funding deficiency, and thereby would find themselves in a surplus position with a problem similar to the Monsanto case.
One way of addressing the solvency funding issues is by amending the Pensions Benefits Standards Regulations, 1985 (PBSR) to permit certain letters of credit with certain characteristics to be recognized as pension assets counting towards solvency valuation deficiency contribution requirements. Letters of credit would provide a relatively inexpensive form of borrowing, and would serve a useful temporary bridging gap to enable pension committees to put into place a plan to ultimately reduce any unfunded obligation. Allowing letters of credit to be treated as plan assets would provide sponsors with additional flexibility to eliminate a solvency deficiency over time without the imposition of a rigid system to divert needed funds away from business operations. As well, it would serve as a means to prevent the sponsor from making excess payment which could result in a surplus. Other jurisdictions, such as Québec, now permit the use of letters of credit as one way of qualifying for extended 10-year solvency deficiency amortization.
Each letter of credit used for solvency funding should contain appropriate terms and conditions to ensure the protection of pension benefits. We recommend that a letter of credit be amortized over a term not to exceed three years, and each letter of credit used to reduce a solvency deficiency should have a sunset clause. Letters of credit are generally issued by banks on an annual basis, subject to renewal at a bank's discretion, although it may be possible in some circumstances for a longer-dated letter of credit to be issued. In the event that a bank was to choose not to renew at the anniversary date, the pension fund should have the ability to draw down on the letter of credit and take the cash.
Extending Solvency Funding Period to 10 Years
TD Bank Financial Group supports extending the solvency funding period to 10 years, as it would provide additional flexibility and reduce a corporation's annual pension payments in certain circumstances. We believe that a system should be implemented that would penalize sponsors the later they contributed, and provide for contribution holidays once a surplus is attained.
Disclosure of Funding Information
TD Bank Financial Group supports greater disclosure and transparency to provide plan members with information about a plan sponsor's financial condition, funding decisions and contribution holidays. This information should be made available to plan members in plain language, so that members can better understand the plan and the impact it could have on their own personal investment decisions outside of the plan.
Pension Benefit Guarantee Fund
TD Bank Financial Group does not support the establishment of a pension benefit guarantee fund. Canadian taxpayers should not be responsible for bailing out companies' under-funded pension obligations – this, in essence, would be a hidden tax to support defaulted pension funds.