Revised funding standard also recommended
The Nova Scotia Pension Review Panel is pushing for a province-wide pension plan, a concept also proposed by a joint expert panel on pensions in Alberta and British Columbia.
The plan would be available to all employers and employees, including self-employed workers. Participation would not be mandatory but employers would be required “to make a conscious choice to either participate or opt out,” states the final report from the Nova Scotia panel, formed in November 2007 to review the pension legislative framework. The detailing of the plan “borrowed liberally” from the Alberta-B.C. proposal, said Bill Black, chair of the Nova Scotia panel and former CEO of Maritime Life, and the response has been very positive. The themes of Nova Scotia’s report are similar to those of other provinces — funding, flexibility and governance. Funding of plans must fulfill all promises and required funding levels must deal openly and realistically with market circumstances, states the report. Flexible regulation is needed to accommodate evolving benefit designs while forms of oversight and governance must be effective and transparent. The report pushes for legislative change in 2009, stating, “the existing framework is not appropriate to today’s circumstances. Left unchanged, it will create considerable difficulty for pension plans, their sponsors and their members.” The report proposes solvency funding (which assumes a plan is wound up on the date of valuation) and going-concern valuations (which take a long-term view of funding requirements) as the minimum funding standards for defined benefit (DB) plans be replaced by an accrued benefit measurement. “We wanted to produce a mildly conservative basis that is less onerous than the solvency standard but deals with all promises,” said Black. The solvency standard has allowed sponsors to ignore certain promises, such as retirement inflation indexing, he said, and going-concern evaluations are a good idea but “no use as a regulatory minimum because there’s not enough control.” But the revised funding standard is “markedly different” from other jurisdictions and “could result in more onerous financial requirements,” according to a Mercer communiqué by Lori Pak, a principal with the HR consulting firm. However, for many plans, the new regime will represent an easing of minimum funding requirements compared with current solvency standards in place — both because the assumptions are less onerous and because deficit amortization is extended from five to 10 years, states the report. The financial risks associated with DB plans should be mitigated by a “collar” of five per cent, states the report. If a plan is in deficit of five per cent or less, the plan may make payments towards the deficit and any deficits over five per cent must be amortized. To mitigate the uncertainty of surplus use and ownership, the panel recommends any surplus up to 105-per-cent minimum funding cannot be amortized and any surplus above 105 per cent can be amortized. The idea of amortizing surplus and deficits over 10 years is important, said Black, and should not just apply “when the market’s in the toilet.” Another recommendation — requiring plans to file a governance plan with the superintendent of pensions — “would consume plan resources but be unlikely to add value for plan members” and run the risk “of impeding appropriate flexibility,” according to Pak in the Mercer release. But this is largely a self-assessment system, said Black, and is in conjunction with efforts to make everything more transparent. In addition, the superintendent’s office “has not the time and arguably not the skill to evaluate everybody’s governance.” The Nova Scotia panel also states safe harbour provisions — meant to provide greater legal protection for plan sponsors — should not be included in the regulations. “If people managing defined contribution plans exercise good judgment (with) the options they provide to people and good communication, in terms of information, they’re not going to have any problems being sued,” said Black.
