Comments of the
Bell Pensioners' Group
A Fine Balance
Ontario Expert Commission on Pensions
27 February 2009
The Bell Pensioners' Group requests that the Ontario Expert Commission on Pensions (OECP) incorporates the following principles and proposals into its final recommendations.
Comments of the BPG on "A Fine Balance"
These comments on the report of the Ontario Expert Commission on Pensions (the Report) are made on behalf of the Bell Pensioners Group (BPG), which represents the interests of the approximately thirty thousand pensioners of Bell Canada. Even though Bell Canada's pension plan is federally regulated, the BPG has participated in the examination conducted by the Commission because the OECP's Report will be seen as an important contribution on pension policy issues generally, and will be relevant beyond those pension plans that are subject to Ontario regulations.
As the Commission is aware, the focus of the BPG is predominantly on issues regarding Defined Benefit (DB) pension plans, and the Bell Canada pension plan is a single employer pension plan, or SEPP, to use the language of the Report. Consequently, though the Report canvasses a wide variety of pension plans, the BPG comments are made in the context of DB SEPP only.
At the outset, the BPG congratulates the OECP for the comprehensive study it has undertaken into the Ontario pension environment, and for its Report which provides many useful recommendations. For example, the Report proposes that the regulator proactively monitor the performance of the pension industry under its purview, and step in where maintenance of the pension promise is in question. Other recommendations support measures, such as legal action and administrative fines, in the case of non-compliance by sponsors and administrators. Though those latter measures may be of some use to encourage compliance, and for this reason the BPG supports them, the BPG nevertheless stresses the importance of regulatory oversight and action on an ongoing basis. Once a plan is in trouble, and especially if it coincides with a sponsor being in financial trouble, no number of fines or legal sanctions imposed on the sponsor is going to help its pensioners. Rather, at that stage they are likely just to make a bad situation worse. It is critically important to pensioners that the regulator understands that its job is not simply to require sponsors to file information with it, but rather to study that information carefully, plan by plan, and to take action immediately when that information indicates that the promise made to some pensioners may be in jeopardy. The BPG believes that the Report reflects this priority, and would like to take this opportunity to encourage this same priority with pension policy makers.
Another positive feature of the Report is that it correctly describes the important role that the ready availability to members of information on plan performance, funding policy, and governance policy can play in maintaining the integrity of the pension promise.
The comments below focus on points of disagreement with the Report, and are offered as suggestions to improve what is already a valuable contribution to pension policy development and pension regulation in Ontario, and in Canada generally.
An underlying theme of the Report is troubling. The Report presents the objective of maintaining the security of existing pension plans as being in conflict, at least in part, with an objective of encouraging new DB plans. The Report cites a need for "balancing" the interests of sponsors with the interests of plan members, and balancing the interests of active and retired members with the interests of "future" members. Indeed, it calls for a purpose clause to be enshrined in legislation that would enjoin regulatory bodies to balance the objective of protecting pension plans with the objective of encouraging new ones. The Report is clear that the Commission has concluded that public policy may have to limit measures that could strengthen the security that retired plan members, for instance, may expect in the hope that potential sponsors might be enticed to make DB plans available on a wider basis.
The BPG disagrees with this approach. Assuming that there is a conflict between these two objectives is unnecessary, and may lead to damaging the integrity of the pension promise already made to the most vulnerable stakeholders. First, it is not obvious that any of the Recommendations found in the Report, other than the one proposing a purpose clause, are a product of the supposed conflict between the two objectives. Second, if regulations are made less rigorous in the belief that relaxed rules may be seen in a more favourable light by potential sponsors, those regulations can only be less effective in protecting the pension promise. Consequently, achievement of the first objective could be endangered by pursuit of the second. To say the least, it would be unfortunate if the risk in achieving the pension promise is increased by regulations which should, instead, be directed at mitigating that risk.
The notion of balancing the two policy objectives raises the possibility that regulation may be allowed to risk somewhat the pension promise already made to existing plan members in the hope that other promises might be extended to other employees. A trade-off between retired members, on the one hand, and sponsors or non-plan employees on the other, is not a trade-off of interests among equals. This inequality is made clear by the observation that sponsors can always adjust their business plans, and active employees can always take steps to improve their pension plans or other compensation going forward, but retired members can never relive their years of employment. This simple fact shows that retirees are the most vulnerable of the groups whose interests the Report would "balance". Regulations that assume retirees are on the same footing with sponsors, active members or future members are premised on a falsehood and may well damage the most vulnerable of these stakeholders. Consequently, they should be avoided.
Pension plans are voluntarily offered and reflect the sponsor's perception of what is required in the labour market. This perception may, of course, be influenced in part by negotiation with unions or other employee groups. The appropriate time to strike a balance between the sponsor's interests and the plan members' interests is when the pension promise is being struck.
Had the Report included as one of its underlying principles that pensions should be viewed as fullfillment of the promise that exchanges pension payments for labour, then any potential lessening of the integrity of a pension plan would be seen to be no more legitimate than would be a retroactive reduction to the salary paid to an employee for work already completed. And the call for "balance" as contemplated in the Report would be seen to be no more appropriate than would be a call for retroactive salary reductions to existing employees so that new employees might be hired, or so that the sponsor's profits might be improved.
The BPG is not suggesting that encouragement of new DB plans is an unworthy objective. Rather, the BPG endorses that objective, but only so long as pension legislation and regulations do not risk achievement of the pension promises already made. It is not clear to what extent new DB plans can be encouraged in today's work environment. However, it is clear that legislation and regulation can protect existing DB plan members, and should do so. The BPG urges the OECP to assure itself that its ultimate recommendations do not threaten the promise that retirees have every right to expect to be fullfilled for the lifetime of work that they have already provided.
The Report quite accurately characterizes funding as one of the most complex and contentious issues in pension policy. Funding regulations are important because there is an undisputed conflict of incentives of the sponsor and its plan members. This conflict is well described in the Report. The BPG applauds the Recommendations that would put in place a "provision for adverse deviation", and accepts that a longer amortization period to fund that provision is reasonable. The Report recommends a 5% "buffer", that is, that plans are to be funded at 105% of solvency levels. The Report proposes an additional three years to fund to this higher level. That is, if a plan is already funded to 95% of solvency, or higher, then the sponsor has eight years to reach 105% of solvency levels. The Report quite rightly recognizes that the further a plan is from solvency, the more urgent it is to take funding steps to correct the situation. Therefore, it concludes that plans funded below the 95% level should continue to have five years to reach solvency. Though the BPG agrees with these recommendations, it builds on them by suggesting that once a plan reaches its funding target, should it later fall below the target level, the current time period it would be allowed to regain target levels should apply. That is, the BPG proposes that, in addition to the recommendations found in the Report, once a plan has been funded to 105% of solvency, should the plan's funding subsequently fall below that level, the sponsor would be required to bring the plan to 105% of solvency within five years.
Recommendations 4-3 through 4-6 contemplate that triennial valuations are sufficient until a solvency threshold is failed, at which time annual valuations would be required, and that the regulator could order an evaluation whenever it thought it necessary. These recommendations would be acceptable in an investment climate where returns are stable and predictable. Unfortunately, the current economic climate makes it all too clear that stability and predictability cannot be assumed. As a result, these recommendations do not adequately address the situation where sudden and significant market changes call into question the most recent valuation. For example, Bell Canada's most recent Pension Information Committee Report, completed in late 2008, shows that as of year end 2007, its DB plan was fully funded. It also noted, however, that investments in 2008 were, at the time of the report, experiencing a return of -10%. In this case, the plan sponsor has good reason to believe that reliance on year end 2007 valuations until late 2011, when the next triennial report would be produced, would not accurately reflect the status of its plan throughout that period. Clearly, in this case the information that would be available to plan members would be quite misleading. To remedy this deficiency, at least in part, the recommendations should be supplemented to include a requirement to file plan valuations annually, such filings to be completed no more than four months following year end.
The Report notes, and supports, "[u]nder present rules, the result of a split or merger must be that such a plan should not be worse off after the transaction than it was before" (page 106). Recommendation 5-17, made with respect to a split of a pension plan, is not consistent with this sound objective. That Recommendation proposes that any surplus can be split so that the original plan is funded to 105% of solvency levels. In the case of a plan that is funded to 110% of solvency levels, for example, leaving 105% in the original plan may result in a surplus of 20% in the new entity. The BPG suggests that if a plan is to be no worse off after a split, then any surplus should be split so that the resulting funds, after the split, have the same surplus, in percentage terms, as did the "pre-split" fund.
Recommendation 5-21 contemplates conversion of a DB plan to a DC plan, and the use of any surplus that may have accrued in the DB plan. The recommendation proposes that the surplus first be used to ensure the DB plan is funded at 105%, and any additional surplus could be used for the DC plan or for contribution holidays. As in the case of a plan split discussed above, maintaining only a 5% buffer in a DB plan that previously had a greater buffer leaves the DB plan worse off than it was before conversion to a DC plan. The BPG suggests instead that the Recommendation call for a surplus in the DB plan to be no less than the surplus prior to conversion, in percentage terms.
Recommendation 6-1 proposes that the regulator establish benchmarks to detect plans "at risk of failure". This would be a useful tool in the Regulator's monitoring role and the BPG strongly endorses the approach. However, the BPG would not want the Regulator to be precluded from obtaining additional information concerning a plan that it may suspect of being in trouble, due to its particular circumstances, even if the plan did not display the benchmark characteristics.
Section 6.3.3 makes recommendations that would enhance the representation of pension interests in federal bankruptcy and insolvency proceedings. The BPG suggests that these recommendations be strengthened by calling for changes to bankruptcy and insolvency legislation that would have the effect of treating pension plans and their members as secured creditors.
Recommendations 8-9 through 8-15 address the role of professional advisers and possible conflicts of interest. The BPG supports these recommendations, and suggests that they would be reinforced if the Recommendations were to articulate that professional advisers, such as investment houses and actuaries, and the plan administrator should understand that their duties are conducted in the aid of, and their loyalties belong to, the welfare of the plan, and thereby the maintenance of the pension promise. In addition, the administrator should be required to document with the regulator the steps it takes to ensure that its duties are conducted in the interests of the plan, and not, for instance, the interests of the sponsor. The regulator should be required to assure itself that these steps are sufficient to this purpose.
In closing, the BPG would like to express its gratitude for the opportunity to take part in this important study of pension policy in Ontario, and to thank the Committee for its study of the current pension environment and its proposals for improvement.