February 25, 2009
The Honourable Dwight Duncan
Minister of Finance
Attention: Comments on Report of the Expert Commission on Pensions
c/o Pension and Income Security Policy Branch
5th Floor, Frost Building South
7 Queen's Park Crescent
Toronto, ON M7A 1Y7
RE: “A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules”, the report of the Expert Commission on Pensions (Ontario) (the Commission)
On behalf of the Board of Trustees of the Hospitals of Ontario Pension Plan (HOOPP), we are pleased to provide you with our response to the Commission’s report (the OECP Report). We prepared this response after considering the Commission’s Terms of Reference. We have also placed particular focus on those matters of concern for HOOPP included in our October 11, 2007 submission (the HOOPP Submission).
In general, HOOPP was very impressed with the work of the Commission and, in particular, of the Commissioner, Dr. Arthurs. We believe the OECP Report and the recommendations it contains are well-considered and, in most respects, true to the title, “A Fine Balance”.
One of the commendable aspects of the OECP Report is outlined in introductory section 1.1.2 – the process by which the Commission undertook its work: the public consultation, engagement with stakeholders and research. The consultative and engaged approach taken by the Commission was especially effective in meeting the needs of all Ontario pension industry stakeholders to be heard. Many stakeholders were engaged and provided the opportunity to share their concerns and ideas with the Commission and this, we believe, was key to the validity and value of the Commission’s findings and recommendations (the pension sector having a unique and often complex nature).
Approach to “Focused Feedback”
The HOOPP Submission was prepared to cover the issues that were and continue to be of particular relevance and importance to HOOPP. As a jointly-sponsored and governed multi-employer pension plan and trust, HOOPP’s duty is to advocate on issues that will be of benefit to the HOOPP Plan and the Fund, thereby serving the interests of the Plan’s beneficiaries. Through advocacy, HOOPP seeks to play a constructive and influential role in the development of public policy and in regulatory reform over matters affecting the administration of the HOOPP Plan and the management and investment of the HOOPP Fund, if not also over matters of broader importance to the pension and investment communities.
In order to provide you with the focused feedback you requested and be consistent with this approach to advocacy, this response to you covers the following points – the main ones set out in the original HOOPP Submission:
The one other issue which HOOPP has included in this response relates to the Federal Investment Regulations and the findings made by the Commission in sections 4.14 and 8.3.2, and in recommendations 4-25 and 8-8 in the OECP Report.
In order to gain a better understanding of the opportunities and challenges for defined benefit pension (DB) plans generally and the HOOPP Plan in particular, HOOPP recently commissioned a survey by The Gandalf Group which covered a random sample of 834 adult Ontarians in the province. This survey yielded some interesting results, including the following:
Statistically, these results are accurate to within +/-3.4% 19 times out of 20.
The results of this research suggest the government may be well-positioned to move on the Commission’s findings and recommendations and that there is strong support among key groups of the electorate to broaden access and pension coverage among Ontarians. It also demonstrates that the DB model is the model most favoured due to its stability and security.
Incidentally, other parts of the research also show that the HOOPP Plan is a key factor in Ontario’s ability to complete its restructuring of the healthcare sector. The HOOPP pension plays a significant role in the attraction and retention of healthcare professionals and, with increased portability, can assist in the further integration of the healthcare system through the new LHIN and community-based structure.
HOOPP staff would be pleased to provide you or your staff with a briefing on our survey results or answer any questions you may have on the survey or the results obtained.
In the HOOPP Submission, HOOPP strongly encouraged the Commission and the Government of Ontario to look for ways to improve pension coverage for Ontario workers. While funding challenges for DB plan sponsors are at a serious juncture, the longer-range outlook is particularly stark for the large majority of the population who are not members in a DB plan or who otherwise have inadequate coverage. Ontarians with inadequate pensions during their working years face a future in which they will be unable to afford to retire or are forced to retire in poverty. If this is not addressed, the result will be an enormous and expensive social, economic and public policy problem.
The findings and recommendations in the OECP Report address the pension coverage problem but, we believe, in way that is not direct and immediate enough: the Commission has made recommendations for legislative and regulatory improvements that will foster an environment where DB plans will flourish. The principles which are adopted to inform the OECP Report included in section 1.5 are to:
The OECP Report also contains the following recommendations:
These are worthwhile recommendations. HOOPP nonetheless urges the government to consider more strategically focused and targeted policies and legislative/regulatory reforms, and to support initiatives, that will more meaningfully and immediately promote broad-based, DB plans in the province, whether for new plans or for improved coverage by existing plans.
Portability of Benefits
The HOOPP Submission included a recommendation that the PBA be improved to enhance the opportunities for Ontario workers who are members of DB plans to transfer their accrued benefits without serious loss of value when they change jobs or employers.
The Commission made recommendations in relation to the enhancement of portability rights and opportunities that include the following:
These recommendations are welcome insofar as they propose new transfer options that provide transferring members with additional choices. They are also welcome insofar as they propose a change to the existing practice of the Superintendent of Financial Institutions to require, as a condition to the approval of group transfers, a “replication” by the importing plan of the benefits being transferred by the exporting plan. The institution of a term like “comparable aggregate value”, in replacement of the current practice requiring “replication” of benefits, would serve to protect transferring member benefits while at the same time allow some measure of flexibility to affected plans when structuring transfers.
If the government’s intention remains to encourage and promote additional participation in and coverage by DB plans, then a careful review of the practices by the Superintendent of Financial Institutions and the Financial Services Commission of Ontario is required on all matters relating to regulation, oversight and requirements with respect to transfers between, and mergers of, MEPPs.
HOOPP agrees with the Commission that the present regulatory impediments to group transfers are inappropriate and should be changed. HOOPP also agrees that commuted values are an appropriate measure of the worth of transferred pension benefits where transfer agreements have not been negotiated with the affected pension plans.
There are often costs associated with pension transfers, especially in situations where the member would achieve a higher value benefit from combining her or his pension benefits in one plan. Sometimes, these costs can be substantial. They are usually borne by the member because it is the member who enjoys the added value and because it is generally not equitable for either plan to assume the costs.
Recommendation 5-5 of the OECP Report encourages the Government of Ontario to “promptly address the pension arrangements for groups of public service employees affected by past divestments and pension transfers”. Some of these groups are currently enrolled in the HOOPP Plan and HOOPP is aware and understanding of their concerns with having “split pensions”. So long as the government provides a way in which these groups can be transferred easily and with minimal costs to the affected pension plans, HOOPP supports the recommendations for changes to the current regulatory impediments. However, as trustees with fiduciary obligations to all HOOPP Plan beneficiaries, HOOPP cannot support changes which would impose on the HOOPP Plan (and, indirectly, all other beneficiaries) the costs of enabling the affected members to combine their pensions, whether through group transfers or otherwise.
The recommendation for the establishment of the Ontario Pension Agency (5-2) is certainly worthy of further consideration. It is not clear, however, how the Ontario Pension Agency could be operated as an “exporting plan” (i.e. where it accepts transfers of the value of individuals’ first pensions) without either a diminishment in the value of the transferring members’ benefits, the imposition of a cost to the transferring members to maintain the value of their transferred benefits or possibly the conversion of the transferred benefits to some form of DC arrangement. The government may wish to explore changes that are less complicated and costly to implement in the short term and that may offer more potential benefit for the pension system.
In the HOOPP Submission, HOOPP advocated for a redraft of the PBA to provide a specially designed regulatory framework for multi-employer pension plans (MEPPs) and to include provisions which properly define the obligations of, and relationships between and among, plan administrators, participating employers and the members of MEPPs. Currently, the PBA does not adequately provide for MEPPs and the relationships among the plan administrator, the participating employers and the members of MEPPs. These relationships are very different and generally more complex than the relationships which exist within single employer pension plans. Existing regulation, therefore, fails to properly balance competing interests and is often overly burdensome and generally not reflective of the current structure and operations of a MEPP, especially a large MEPP.
HOOPP strongly favours recommendation 4-9 of the OECP Report which provides that “[f]ollowing consultation with Ontario’s multi-employer pension plans, special legislation and regulations should be developed relating to all aspects of their funding, regulation and governance.” HOOPP would be very interested in participating in any consultations with the Government of Ontario towards the development of special legislation and regulations for MEPPs. We believe that, consistent with the Commission’s finding, the government may be able to create an environment more favourable to the expansion and success of large-scale DB MEPPs in Ontario through the introduction of such special legislation and regulations.
We note that many of the “Expert Advisors’ Consensus Recommendations on Technical and Operational Issues” relate to matters relevant to the operation of MEPPs and we strongly encourage that these technical issues be made part of the review with MEPP representatives during the government’s MEPP consultations recommended by the Commission.
The Commission made a number of recommendations in part seven of the OECP Report (e.g. recommendations 7.1, 7.2, 7.3 and 7.17) for making the PBA the exclusive law for pensions in Ontario. We strongly agree that these recommended changes, provided any new legislation is well-drafted and clear, would represent valuable improvements in current pension law.
Wind-up funding/solvency requirements
In the HOOPP Submission, it was noted that the Government of Ontario had already taken steps to address some of the challenges posed by solvency funding requirements for certain qualified MEPPs. HOOPP requested that a broader exemption from the wind-up funding/solvency rules should be applied to MEPPs like HOOPP.
HOOPP is very pleased that recommendations 4-8 and 4-10 contained in the OECP Report were so responsive to the HOOPP request. HOOPP strongly encourages the adoption of the Commission’s recommendations – that legislation be introduced to provide for separate funding rules for MEPPs, JSPPs and SEPPs based on their distinct characteristics. Recognizing the unique, long-term horizons for MEPPs and JSPPs, such plans should be allowed greater flexibility in their funding arrangements than the rules that apply for SEPPs.
In addition, it is entirely appropriate that MEPPs be funded based on going concern valuations and not also on solvency valuations. However, recommendation 4-10 also proposes that solvency valuations be disclosed to active members and retirees. HOOPP favours transparency as a general principle of pension plan governance and supports the notion that there be disclosure by MEPPs to their active and retired members as to its funded position on a solvency valuation basis. However, HOOPP favours disclosure rules which will allow the plan administrator reasonable flexibility in determining the most effective and efficient way to make disclosure (e.g. in annual statements and/or annual reports).
Except for attributing the value of immediate vesting of its members with less than two years’ service, HOOPP assigns commuted values to the accrued benefits of its terminating members substantially the same as they would receive under the existing partial wind-up rules (i.e. commuted value payouts include the value of the Plan’s early retirement features and indexation). Included in the HOOPP Submission was a request that, so long as HOOPP and any other pension plans maintain such practices, an exemption from the partial wind-up rules should also apply to them.
Recommendation 5-16 is one of the few recommendations dealing with changes to the rules relating to partial plan wind-ups in the OECP Report. This recommendation states that MEPPs and JSPPs which experience a reduction in its active membership of 40%, or of sponsors that provide 40% of its contributions, a plan reduction report should be prepared and filed with the regulator. Otherwise, the regulator “may require the administrator to prepare and file such a report if there are reasonable grounds to believe the plan may no longer be viable”.
HOOPP considers this recommended change to be an improvement in the current rules insofar as it clarifies and extends the threshold for determining a partial wind-up has occurred. However, HOOPP prefers the approach which it advocated in the HOOPP Submission – that the partial wind-up rules should not apply to plans like HOOPP which treat terminating members substantially the same as they would be treated in the event they were included in a partial wind-up.
If the Commission’s recommendation 5-11 – that there be immediate vesting of all members upon enrolment – is adopted in new legislation, then the value of this feature would also be included in the calculation of commuted values. Terminating HOOPP members would receive this value and get the same treatment as members would if the current partial wind-up rules were applied.
“Federal Investment Regulations”
HOOPP strongly supports recommendations 4-25 and 8-8 in the OECP Report and the findings which underlie them. HOOPP agrees that the Ontario government should attempt to persuade the federal government to reform the Federal Investment Regulations, particularly those regulations that impose quantitative restrictions that no longer make sense. HOOPP notes that the federal Department of Finance has published the paper titled “Strengthening the Legislative and Regulatory Framework for Private Pension Plans Subject to the Pension Benefits Standards Act, 1985” dated January, 2009 and that this paper invites comment on how the federal government might “improve the regulatory framework governing pension investment”. HOOPP is considering its response to the federal government’s invitation.
HOOPP strongly encourages the Ontario government to follow the Commission’s recommendations and to establish its own set of investment rules should the federal government not reform the quantitative restrictions at all within a reasonable period of time or fail to do it in a sensible manner.
HOOPP also agrees with the OECP Report that plan administrators that have “the capacity to make complex and consequential investment decisions that require active rather than passive participation in corporate management” should be exempted from the need to comply with the “30% rule”: the quantitative restriction which prohibits a pension plan from owning more than 30 per cent of the voting shares of a single corporation.
HOOPP believes that joint governance is a critical foundation of a successful pension system and is gratified by the recognition paid by the Commission to the value and importance of the joint pension governance model. HOOPP strongly encourages the Government of Ontario to keep this principle in the forefront of its pension legislative and regulatory reform.
Current Challenges vs. the OECP’s Longer Range Mandate
Among the very serious challenges confronting the Ontario pension system, the most serious – the funding challenges - have clearly become the most urgent since the recent capital market declines. The situation is much the same for pension systems in other jurisdictions within Canada and, indeed, in countries in other parts of the world. The immediate funding crisis threatens to overshadow the recommendations of the OECP for resolving the longer range challenges for the Ontario pension system. We strongly urge the Government of Ontario to maintain within its focus and priorities (i) pension system reform, especially reform of the PBA to specifically regulate MEPPs and DB plans, and (ii) those other recommendations in the OECP Report that will enhance the operational effectiveness and success of MEPPs and DB plans.
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We wish to express our sincere appreciation for the fine work which the Commission has performed for the Government of Ontario and for the opportunity to participate in this very important legislative and regulatory reform initiative.
We believe DB plans play an important social policy role in contributing to the financial well-being of retired members and of creating pools of capital that tend to target stable, long-term investments and thereby encourage stability in the capital markets. We believe HOOPP, in particular, provides a key attractive benefit to those working in Ontario’s healthcare sector and offers healthcare employers a valuable asset for recruitment and retention. HOOPP is well-positioned to fulfill “the pension promise” of even more Ontarian’s where opportunities present themselves.
If you have any questions or wish us to clarify any of the points in this letter or in the HOOPP Submission, please feel free to contact John A. Crocker, HOOPP’s President, CEO and Plan Manager (416-350-4841 or firstname.lastname@example.org).
We look forward to continued discussions with you on these important matters.
Yours very truly,
HOSPITALS OF ONTARIO PENSION PLAN
Marcelle Goldenberg Ron Meredith-Jones
Board Chair Board Vice Chair