Three federally regulated plans get green light from pensions regulator
Funding difficulties for private pension plans continue to rise, with the number of troubled federally regulated plans jumping from 75 to 84 in the last three months of 2005 alone.
That’s according to records obtained from, and confirmed by, the Office of the Superintendent of Financial Institutions (OSFI), the regulator of about 1,280 private pension plans in the federally regulated sector.
As a result, for the first time, the office has given permission to three plans to reduce benefits, said OSFI spokesperson Julie Corbett. Seven other such requests are still being processed.
Two other plans have approached the office to signal the possibility that they’ll make similar requests in the future, said Corbett.
According to a Canadian Press report, OSFI briefing notes from February warn of trouble ahead in 2006. “Interest rate declines through 2005 and the introduction of new actuarial standards will result in significantly higher funding requirements for most defined benefit pension plans in 2006,” the document states. “Unless significant positive changes occur in the environment, we expect the financial strength of pension plans to deteriorate further and the number of plans on the watch list to continue rising during 2006.”
Corbett declined to name the three plans that have received approval to reduce benefits, but acknowledged they are the first plans to be approved for such a measure. Prior to 2000, there had been no such requests, she said.
At the provincial level, such requests are starting to make their way to the superintendents of pensions for approval. In Saskatchewan, deputy superintendent Art Milne said the office received at least three requests last year, none affecting people already retired. The changes approved were a mix of changes to the age-and-years-of-service formula as well as changes to the actual value of the benefits themselves.
“We expect to see more requests in the future,” said Milne.
One defined benefit pension plan that recently averted a clawback is the Healthcare Employees’ Pension Plan in Manitoba, which has 46,000 members and $2 billion in assets. John McLaughlin, executive director of the plan, said although the plan was still fully funded, the management team decided on a “pre-emptive strike.”
As a result, the team approached members and sponsors about increasing contributions to the tune of $50 million a year — $25 million from members and another $25 million from sponsors. The suggestion was roundly rejected.
McLaughlin said plan managers then suggested reducing benefits. The proposed measures would have affected termination benefits, with lump-sum commuted value payments subjected to a six-per-cent reduction instead of the current three per cent, and deferred pensions subjected to a similar six-per-cent reduction instead of the current three per cent. As well, the eligibility criteria would be altered to include a minimum age of 55, a change that “would affect quite a lot of people.”
Faced with that option, the board trustees agreed to the $50 million contribution increases, bringing up members’ and sponsors’ contribution from five per cent to 6.4 per cent effective last July (with two more increases of 0.2 per cent each this year and next year). Thus, the plan avoided benefit reductions.
In British Columbia, lawyer and pensions specialist Scott Sweatman said there were eight plans last year that reduced benefits in order to meet the solvency tests set out by the province’s Pension Benefits Standards Act. As is typical of most pension legislation, plans cannot make changes to benefits that have already been accrued or paid out. However, for negotiated cost plans — in which the employer’s level of contribution has been predetermined — an exception can be made if the circumstances of the plan require benefit reductions, said Sweatman, associate counsel at the Vancouver office of Blake, Cassels & Graydon.
In one of the more prominent disputes reaching the B.C. Supreme Court, the discretionary power of trustees to reduce benefits was put into question, Sweatman said. In the case, Neville v. Wynne, the trustees of the Plumbing & Pipefitting Workers Local 170 Pension Plan were facing losses of $51 million between October 2000 and September 2001, and another $19 million by the following September.
The trustees recommended reducing benefits by 13.5 per cent for both active members and retired members. They also proposed additional reductions affecting members still in the workforce, prompting the plaintiff to challenge the trustees’ partiality. The court said it was reluctant to overturn the trustees’ decisions because there was no evidence they had considered “irrelevant” or “improper” or “irrational” factors. The case is under appeal.
At the Association of Canadian Pension Management, president Scott Perkin said he was surprised to hear of requests to, and the approvals granted by, OSFI.
“We haven’t been seeing a lot of that. It’s interesting. I don’t know how widespread it really is. It’s troubling obviously that some plans have to resort to that type of measure but these are serious funding challenges that plans are facing. And we may see more of that as time goes on.”
That’s according to records obtained from, and confirmed by, the Office of the Superintendent of Financial Institutions (OSFI), the regulator of about 1,280 private pension plans in the federally regulated sector.
As a result, for the first time, the office has given permission to three plans to reduce benefits, said OSFI spokesperson Julie Corbett. Seven other such requests are still being processed.
Two other plans have approached the office to signal the possibility that they’ll make similar requests in the future, said Corbett.
According to a Canadian Press report, OSFI briefing notes from February warn of trouble ahead in 2006. “Interest rate declines through 2005 and the introduction of new actuarial standards will result in significantly higher funding requirements for most defined benefit pension plans in 2006,” the document states. “Unless significant positive changes occur in the environment, we expect the financial strength of pension plans to deteriorate further and the number of plans on the watch list to continue rising during 2006.”
Corbett declined to name the three plans that have received approval to reduce benefits, but acknowledged they are the first plans to be approved for such a measure. Prior to 2000, there had been no such requests, she said.
At the provincial level, such requests are starting to make their way to the superintendents of pensions for approval. In Saskatchewan, deputy superintendent Art Milne said the office received at least three requests last year, none affecting people already retired. The changes approved were a mix of changes to the age-and-years-of-service formula as well as changes to the actual value of the benefits themselves.
“We expect to see more requests in the future,” said Milne.
One defined benefit pension plan that recently averted a clawback is the Healthcare Employees’ Pension Plan in Manitoba, which has 46,000 members and $2 billion in assets. John McLaughlin, executive director of the plan, said although the plan was still fully funded, the management team decided on a “pre-emptive strike.”
As a result, the team approached members and sponsors about increasing contributions to the tune of $50 million a year — $25 million from members and another $25 million from sponsors. The suggestion was roundly rejected.
McLaughlin said plan managers then suggested reducing benefits. The proposed measures would have affected termination benefits, with lump-sum commuted value payments subjected to a six-per-cent reduction instead of the current three per cent, and deferred pensions subjected to a similar six-per-cent reduction instead of the current three per cent. As well, the eligibility criteria would be altered to include a minimum age of 55, a change that “would affect quite a lot of people.”
Faced with that option, the board trustees agreed to the $50 million contribution increases, bringing up members’ and sponsors’ contribution from five per cent to 6.4 per cent effective last July (with two more increases of 0.2 per cent each this year and next year). Thus, the plan avoided benefit reductions.
In British Columbia, lawyer and pensions specialist Scott Sweatman said there were eight plans last year that reduced benefits in order to meet the solvency tests set out by the province’s Pension Benefits Standards Act. As is typical of most pension legislation, plans cannot make changes to benefits that have already been accrued or paid out. However, for negotiated cost plans — in which the employer’s level of contribution has been predetermined — an exception can be made if the circumstances of the plan require benefit reductions, said Sweatman, associate counsel at the Vancouver office of Blake, Cassels & Graydon.
In one of the more prominent disputes reaching the B.C. Supreme Court, the discretionary power of trustees to reduce benefits was put into question, Sweatman said. In the case, Neville v. Wynne, the trustees of the Plumbing & Pipefitting Workers Local 170 Pension Plan were facing losses of $51 million between October 2000 and September 2001, and another $19 million by the following September.
The trustees recommended reducing benefits by 13.5 per cent for both active members and retired members. They also proposed additional reductions affecting members still in the workforce, prompting the plaintiff to challenge the trustees’ partiality. The court said it was reluctant to overturn the trustees’ decisions because there was no evidence they had considered “irrelevant” or “improper” or “irrational” factors. The case is under appeal.
At the Association of Canadian Pension Management, president Scott Perkin said he was surprised to hear of requests to, and the approvals granted by, OSFI.
“We haven’t been seeing a lot of that. It’s interesting. I don’t know how widespread it really is. It’s troubling obviously that some plans have to resort to that type of measure but these are serious funding challenges that plans are facing. And we may see more of that as time goes on.”
