The Ontario government is asking defined benefit plan executives in the province for their views on how to change its complex pension fund valuation rules.
At issue is the current practice of filing two valuations each plan year: one is a solvency valuation that values a DB plan as though it had been terminated and all obligations settled as of the filing year; and the other, a going-concern valuation that assumes the plan will never be terminated. Both public and corporate pension plans in the province — Canada’s largest by population and number of DB plans — are required to submit both valuations each year, with funding based on the method that shows the higher contribution.
The Ontario Ministry of Finance’s suggestions for reform are in a consultation paper issued in July, and comment is being accepted until Sept. 30.
Pension plan sponsors are being asked whether the province should tweak or eliminate solvency valuation requirements or make adjustments to going-concern funding rules, and to introduce their own ideas on what valuation changes should be made.
“In recent years, low long-term interest rates have placed funding pressures on pension plan sponsors of single-employer defined benefit pension plans,” said Scott Blodgett, spokesman for the Ontario finance ministry. Mr. Blodgett said the review by the finance ministry aims to “develop a balanced set of solvency funding reforms that would focus on plan sustainability, affordability and benefit security, and take into account the interests of pension stakeholders, including sponsors, unions, members and retirees.”
“As time has gone on, rates have gone lower,” said Allan Shapira, managing director, Aon Hewitt Canada, Toronto. “This is now a chronic problem. The onerous issue here is to have to fund to a termination number (under solvency valuation). In a world of low interest rates, the thought that you’d have enough money to fund to that has become too expensive.”
Added Gavin Benjamin, senior consulting actuary, Willis Towers Watson, Toronto, “In a low-rate environment, solvency deficits tend to increase. There’s just more pressure from funding plans in a low-interest-rate environment.”
While much pension regulation in Canadian provinces usually follows the lead of Ontario, with the province recently leading the charge that resulted in a national supplemental plan for the C$278.9 billion ($211.7 billion) Canada Pension Plan, Ottawa, the province is lagging others that have taken steps to reform their pension fund valuation rules. Quebec, at the start of this year, implemented new rules that eliminated solvency valuation entirely for corporate DB plans and enhanced its going-concern valuation rules to increase pension fund contributions. (Public plans in Quebec already were exempt from solvency valuation.) Saskatchewan is considering legislation that would eliminate solvency valuation for the six multiemployer plans based in the province, and Alberta and British Columbia changed their solvency valuation rules to allow plan sponsors to hold surplus solvency assets in a reserve fund that they can access.
Pension fund regulations in Canada are set by each province separately, with the exception of DB plans that have employees in every province; those plans are covered by federal regulations.
Ontario hasn’t exactly stood pat while other provinces changed pension fund accounting rules. The province in 2012 issued temporarily relief for solvency funding by allowing DB plans to smooth their contributions for each plan year over 10 years, from the established five-year span. But moving beyond that has been difficult, said Julien Ranger, partner, pensions and benefits, at law firm Osler Hoskin & Harcourt LLP, Montreal.
“There’s been reluctance because of the importance of benefit security to this government,” Mr. Ranger said. “Most unionized employees are in Ontario and Quebec. Solvency originally became a concern in the late 1960s because of economic concerns then. Now we’re at a very different time for governments. On the one hand, do you give incentives to maintain the few defined benefit plans that are left, or do you just say those plans are gone and we should protect the employees some other way? There’s been a history of bankruptcies in Canada that have hurt pensions, like Nortel, U.S. Steel Canada. Those bankruptcies have stuck in people’s minds.”
How Ontario will decide the issue is anyone’s guess, said Aon Hewitt’s Mr. Shapira. “We in Canada seem to attack the same problem with different solutions by province,” he said. “I wouldn’t be surprised if Ontario does something different from Quebec. … I think there is a sense of urgency because of the impact solvency has on pension funding. Slight modifications might be easy to do quickly, but if there are major changes, that might take a longer period of time to do. But employers would like to get this done as soon as possible. Some expect this to be decided in 2017.”
Pension plans contacted by Pensions & Investments said they would not comment on their recommendations until September. OPTrust, which manages the assets of the C$18.4 billion Ontario Public Service Employees Union Pension Plan, Toronto, “is pleased to see the Ontario government undertake this review and its recognition of the importance of workplace defined benefit pension plans,” spokeswoman Karen Danylak said. “We are currently working on a submission to the Ministry of Finance and look forward to providing our insights and feedback.”
Ontario’s consultation paper is available on the finance ministry’s website.???