Pension report takes balanced approach

Ontario’s expert commission makes 142 recommendations
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 12/14/2008

Two years after it began, Ontario’s Expert Commission on Pensions has released its final and extensive 222-page report, A Fine Balance — Safe Pensions, Affordable Plans, Fair Rules, by Harry Arthurs, former president of York University. His ultimate goal? Greater pension coverage.

“Coverage should not be achieved by impairing the security of the pension promise for workers and retirees, but security cannot realistically be purchased if sponsors are required to pay too high a price for it. In short, a delicate balance has to be struck among policy goals that are all desirable but not always easily reconciled.”

The report details 142 recommendations, covering topics and issues such as funding, regulation, governance and innovation. (It was publicly released one week before a report from the Joint Expert Panel on Pension Standards from Alberta and British Columbia, which will be covered in the Jan. 12 issue of Canadian HR Reporter.)

“There are many things in the recommendations that are very favourable for plan sponsors, but there are also quite a number very favourable for plan members,” said Jeffrey Sommers, partner and member of the pension and employee benefits group at law firm Blakes in Toronto. “If these recommendations were implemented, it is a good step forward in terms of pension reform in Ontario, which is long overdue.”

The list covers most of the areas that have resulted in litigation in the pension area over the past 10 years, said Sommers. One concerns the Monsanto decision, which would be specifically overruled if the recommendations are implemented, so there would be no requirement to distribute surplus to members on a partial wind-up, a point of contention since the Supreme Court decision, he said.

The report also recommends relaxing the requirements for the withdrawal of surplus. So if a single employer pension plan (SEPP) is in surplus on being wound up, the surplus should be distributed according to the plan documents, unless these are not clear. In that case, a deal can be struck between the members and the employer. And if there is further disagreement, the dispute can be decided by a newly created Pension Tribunal of Ontario.

This would eliminate the current two-pronged rules that state an employer can receive the surplus if the documents say the employer owns it and there is agreement with members, said Sommers.

Sponsors could apply to withdraw surplus from an ongoing plan, as long as the plan remains funded at 125 per cent on a solvency basis or 105 per cent plus two years’ worth of current services costs. And they could reduce or omit contributions to a plan funded at 105 per cent or more of its solvency liabilities.

While this should make the process easier, the chances of getting to 125 per cent are fairly remote, said David Burke, Toronto-based retirement practice director for Canada at Watson Wyatt Worldwide.

“Being able to take a contribution holiday at 105 (per cent) and only allowing surplus withdrawals at 125 per cent seems like a big gap.”

As long as a plan is 95 per cent funded on a solvency basis, the amortization period for achieving the funding level would be extended from five to eight years, according to A Fine Balance.

Pushing for joint plans

The report also recommends greater adoption of jointly governed target benefit plans, in which the funding and governance are shared between the sponsor and members.

“So you’re giving up some control of your plan but the benefit you reap is that there is no requirement to fund on a solvency basis at all, so that’s a real incentive financially,” said Sommers.

“The commission is focusing more on transparency and not only making members more aware of how the plan runs and providing information but actually getting them involved in the administration of the plan.”

Clearly Arthurs thinks the wave of the future is jointly governed target benefit plans, said Burke, and plan sponsors might be prepared to live with some of the concerns they have with shared governance or creating a target benefit. But for members, the benefits are debatable.

“If I’ve got (no plan), certainly I like that. If I’ve got a defined benefit plan, I like that, because now at least I’m sharing the investment risk. But if I’m moving from a pension promise to one of these plans, I’m not sure I like that, as an employee,” said Burke, adding sponsors may prefer to stick with a DC plan because of its simplicity. “People struggle to understand what a basic defined benefit plan is and (if) you add in the additional complexity of a target benefit, I worry about that.”

Arthurs is taking a socialist approach to pension problems, said James Murta, immediate past president of the Canadian Institute of Actuaries.

“When you look at pension plans and which ones have problems and which don’t, most of the ones that have problems have joint boards,” he said. “It creates so many barriers to continuing defined benefit plans that it comes to a point where employers say, ‘enough’s enough,’ and switch over to something else.”

Another concern for SEPPs is greater volatility in contributions because they would still have to contribute on a solvency basis, create the security reserve and not be allowed to smooth assets and liabilities (in which unusually high returns in a given year are spread over a multi-year period to lower the volatility of the profit and loss credit from pension fund returns) as they can today, said Burke.

“Had (Arthurs’) legislation been in place now, it could have been a disaster for many organizations. Even as it stands, it still could be a disaster, but removing the smoothing and the exclusions is putting a lot more stress potentially on single employer plan sponsors, so that’s definitely negative.”

Several new bodies

In addition to the creation of a Pension Tribunal, the commission recommends the establishment of an Ontario Pension Regulator, comparable to the Ontario Securities Commission, and the creation of a “pension champion,” an agency or unit of government that would work closely with stakeholders and a proposed Pension Community Advisory Council to facilitate innovation and policy development.

“All of these on their own seem like a good thing. Collectively, you wonder about the costs and the bureaucracy,” said Burke. “Who’s going to pay for this?”

Another suggestion that might not go over well with sponsors is the requirement for an advisory committee, unless members vote not to have one. The group would not have decision-making responsibility but the plan sponsor would have to ensure it is kept in the loop and show everything filed with the regulator.

“It’s to help facilitate the sharing of information about the plan with members and increase the transparency, which is a good goal, but plan sponsors may view it as another regulatory obstacle in terms of more red tape,” said Sommers.

The report also recommends letters of credit be allowed as security for contributions, within limits and only for a fixed time period.

“You could argue only those who have good credit could ever use the letter of credit and it doesn’t solve your solvency issues in a lot of cases but that’s something sponsors had been clamouring for,” said Sommers.

And with this expert report from a bi-partisan commission, with advisors from both ends of the spectrum, “if the government can’t get reforms done now, I don’t know when they ever will,” he said.