27 steps to build Canada’s 21st century pension system

Steps recommended by consulting firm Towers Perrin

The 27 steps recommended by consulting services firm Towers Perrin, urging government, plan sponsors and plan members to come together to rejuvenate the pension system for the 21st century.

Pension and tax regulators

•create one national pension regulator, virtual or physical;

•review system principles at set intervals to limit/avoid ad hoc change;

•require effective vesting (e.g., include early retirement subsidies in termination benefits);

•remove barriers to offering voluntary and involuntary early retirement windows;

•remove barriers to postponed and phased-in retirement;

•make the pension plan a contractual (not trust) arrangement between employer and employee;

•enshrine control over surplus with employer, subject to the following conditions:

-minimum cushion earmarked for adverse events

-surplus above cushion available for contribution holidays

-surplus at plan termination reverts to sponsor

-very large surplus — to be defined — may qualify for non-windup reversion if members consent

-continuation of back-loaded plans but with greater restrictions on surplus usage;

•ease minimum funding standards to recognize that most companies are at very low risk of bankruptcy — replace 100 per cent funding with a probability-based model;

•eliminate statutory grow-in provisions;

•substantially increase Income Tax Act pension limit to make up for 28-year freeze, enabling employers to pre-fund more pension on a tax-deferred basis; and

•increase the amount of surplus that may be held in a plan prior to requiring contribution holidays.

Canadian Institute of Actuaries

•develop a probability based model for plan funding; and

•impress upon all that, no matter how precise, pension liability measures are still rough estimates and crystallize only when a plan is wound up.

Plan sponsors

•recognize pension value as deferred compensation;

•alter vesting provisions to include early retirement subsidies, wage growth, etc.;

•alter retirement provisions to provide more flexibility;

•remove plant closure provisions from pension plans;

•clarify the pension deal in employee communications;

•explicitly recognize the asset-liability mismatch that occurs when securities whose future value is unknown are used to fund liabilities whose future value is known;

•categorize asset classes according to how much they behave like plan liabilities. Identify a matched portfolio with minimal risk and use it as a benchmark in measuring the risk-reward tradeoffs in other asset mixes; and

•focus investment management not on relative performance, but on ability to match funding commitments to the sponsor’s business cycle.

Accounting standard setters

•mark to market the plan’s long-term inflation assumption as well as its liabilities;

•require fair value of assets to be used in pension expense;

•require five-year amortization in recognizing liability gains/losses as well as investment gains/losses relative to the discount rate;

•separate operating cost from financing costs; and

•recognize cost of benefit improvements over period consistent with its value recognition.


•provide pension beneficiaries with priority claim in bankruptcy proceedings, subject to specified limits.

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