The Ontario Government has recently announced that it is implementing a new “framework” for funding for defined benefit pension plans.

The new funding rules include:

• Requiring funding on an enhanced going concern basis; changes to the going concern funding rules include shortening the amortization period from 15 years to 10 years for funding a shortfall in the plan and consolidating special payment requirements into a single schedule.
• Requiring funding of a reserve within the plan, called a Provision for Adverse Deviation or PfAD. This reserve will help manage future risk and help ensure benefits are secure.
• Requiring funding on a solvency basis in the event that a plan’s funded status falls below 85 per cent. Essentially, this means that the solvency valuation requirement will disappear for most defined benefit plans in Ontario.

Opinion of Westcoast Actuaries Inc.

In our opinion, the announcement by Ontario is to be applauded as a large step in the right direction. This follows along from changes to the Quebec Supplementary Pension Plans Act which eliminated solvency valuations entirely. We hope that the lead set by Quebec and Ontario will now be followed by all other provincial governments.

When solvency rules were first legislated, the impact was relatively light as high interest rates used for solvency valuations almost always produced a lower liability than a going concern valuation for final earnings plans. With the gradual drop in interest rates, solvency valuations started to have a negative impact on the viability of DB pension plans. Now we are faced with the situation where most DB plans are actually funding on a solvency basis. It seems incongruous that legislation requires plans which are healthy on an ongoing funding basis are required to fund as if they are winding up. In our opinion the constraints involved in solvency funding have been a large contributor to DB plans being wound-up.

In our opinion, the current perceived crisis in retirement income for Canadians has come about because of the continuing disincentives which impact employer sponsored pension plans. In the past employers were prompted to reward long service employees by providing them with financial security in their retirement years with a pension. This was normally provided by a DB pension plan where the member had a pretty good idea what pension they would be receiving to assist in personal retirement planning.

There are many reasons why the once healthy DB plan regime has declined to such an extent that it may be extinct in a few years. From our experience with pension plan sponsors, a major concern is the high cost of solvency funding and the volatility in contribution requirements.

We feel that the basic underlying concept of pension funding should be on a going concern basis which should allow the plan sponsor a high measure of stability in contribution levels from year-to-year at an affordable cost. This should be the basic requirement for an ongoing legislative funding structure. This appears to be endorsed by the changes in Quebec and Ontario.

Steve O’Grady, FCIA, FSA
Senior Consulting Actuary