February 17, 2009
Deputy Minister of Finance and Security of Treasury BC
Deputy Minister's Office
Frost Bldg S., 7th Flr
7 Queens Park Cres
Toronto ON M7A1Y7
Re: Submissions on behalf of the City of Toronto in response to the Report of the Ontario Expert Commission on Pensions
Please accept this letter as the City of Toronto's submission in response to the Report of the Expert Commission on Pensions — "A Fine Balance" (the "Report"). The City's submissions are focussed on the two issues of greatest importance for the City as a sponsor of defined benefit pension plans: (1) Solvency Funding Relief and (2) Surplus Entitlement and Distributions Rules. We conclude by discussing an additional issue of importance that was not addressed in the Report – the ability to verify that pension payments are being made to the correct individuals.
The City currently sponsors five pension plans that were established before the Ontario Municipal Employees' Retirement System ("OMERS") was created in 1965 and all new municipal employees were required to participate in OMERS commencing in 1968. The City is one of three municipalities in Ontario that continue to sponsor and administer pre-OMERS pension plans for its employees and retirees.
Three of the five pension plans have or may soon have solvency deficiencies, requiring the City to make substantial special payments on a yearly basis to amortize the solvency deficiency. All of the City's pre-OMERS plans have a low number of active members (all of whom have more than 35 years of service) and no longer require contributions each year.
However, the current solvency funding rules in Ontario require a plan to be valued and funded on the assumption that the plan may be immediately wound up with all amounts coming due. Such solvency deficiencies require payments sufficient to pay off the deficiency over an amortization period of five years. This often results in large annual special payments directed at protecting the plans in the event of a closure of business or winding down of operations. While these outcomes may be likely in some private sector operations, the same cannot be said of the City. Therefore, in the City's circumstances, such special payments are made using tax revenue that would better be used, and ought to be directed, for other purposes.
In contrast to the three pension plans in deficit positions, at least one of the City's pension plans is in a substantial excess surplus position. Fair and accessible surplus distribution rules, as recommended by the Report, will enable plan sponsors to efficiently share the surplus with plan members and retirees when appropriate to do so or claim entitlement to surplus that has built up through years of ongoing employer contributions.
While the City commends the work of the Expert Commission on Pensions, the City urges the Government to go beyond the Report's recommendations regarding funding, in particular, with regard to solvency funding. The Report does not address the current problems experienced by plan sponsors as a result of the economic downturn and the Government must act to provide meaningful solvency funding relief by providing a range of options to plan sponsors.
Solvency funding relief should be tailored to meet the needs of different plan sponsors. In that vein, the City urges the Government to adopt solvency funding relief targeted at providing relief specifically to municipal plan sponsors. The call for targeted relief is predicated on the reality that municipalities are uniquely positioned as plan sponsors. Unlike private employers, municipalities are unlikely to become bankrupt. At the same time, municipalities derive their operating funds from scarce resources, including tax dollars, and solvency funding payments place additional burdens on municipal budgets and planning.
We urge the Government to adopt solvency funding relief that recognizes the unique position of municipal plan sponsors in Ontario. Specifically, the Government should look to examples in other provinces where relief has been provided to municipal plan sponsors, recognizing their unique position and experiences. In particular, the City urges the Government to consider adopting a lower funding threshold for triggering solvency funding.
It should be noted that none of the options set out in the report adequately addresses the solvency funding issues of the City of Toronto, given its unique circumstance and that of other municipalities who provide non-OMERS pension plans (City of Ottawa and City of Hamilton). I must stress that the current solvency funding levels add an unreasonable financial burden to taxpayers. Accordingly, the City submits that the most appropriate form of solvency funding relief for the City of Toronto and other municipalities who provide non-OMERS pension plans, is adopting a lower funding threshold for triggering solvency funding. The City further suggests that this funding threshold should be set at 80%. This alternative option is set out below.
The City strongly supports the Report's recommendation regarding surplus distribution. Recommendation 4-16 sets out a fair and efficient means of distributing plan surplus upon wind up. In particular, the City supports the process by which plan sponsors and members may reach a negotiated agreement that must be respected by the Superintendent or apply for a hearing with the Financial Services Tribunal for an agreement to be mandated that would be final and binding on the parties. This recommendation reflects the current practice of pension plan stakeholders in Ontario, while providing additional efficiencies.
Ensuring Accuracy of Beneficiary Lists
The Report recommends several measures to address "stranded pensions" and unlocated beneficiaries. However, the Report does not address any means by which plan administrators can monitor and ensure that payments are being made to the proper individuals. Currently, pension plans do not have access to the Provincial Death Registry. Providing access to the Registry will enable plan administrators to efficiently monitor the accuracy of their beneficiary lists and to ensure that the plan is continuing to pay benefits to the correct individual.
Solvency Funding Relief – Comments on Report Recommendations
Recommendation 4-13 — Single employer pension plans should continue to fund according to both going concern and solvency valuations.
The City agrees with this recommendation in principle. However, the Government must recognize that solvency funding requirements must be appropriately addressed to ease the pressure on plan sponsors. Specifically, the City submits that the Government should provide a range of solvency funding relief options that are tailored to the needs of the wide-ranging community of plan sponsors in Ontario. As will be discussed in more detail below, the City's chief recommendation to the Government is the introduction of funding relief specifically available for the few municipalities in Ontario that continue to sponsor pre-OMERS pension plans.
Recommendation 4-14 — Single employer pension plans should be required to maintain a security margin (or provision for adverse deviation) of 5% of solvency liabilities. This margin should be amortized over an eight-year period. The security margin should be deemed to be part of the plan surplus on wind-up, but not for other purposes.
The City does not support the adoption of a security margin or "collar" if plan sponsors would be required to actively contribute to achieve the margin. In the current economy, the Government must be focussed on balancing the need for providing relief to plan sponsors with the benefits security interests of members. However, the Government should not, in this economy, implement measures that require additional contributions to a pension plan in the name of benefits security. If the Government were to adopt this measure, the City submits that the Government should exempt municipal plan sponsors from the requirement to maintain a security margin or only require that the margin be developed through the use of actuarial gains, not actual contributions.
Recommendation 4-15 — For plans that have achieved 95% of solvency funding, the normal amortization period for achieving the new required funding level, inclusive of the security margin, should be extended from five to eight years. For plans funded below 95%, the current amortization period of five years should continue to apply until such time as they become eligible for the extended amortization period.
Recommendation 4-22 — Irrevocable letters of credit should be permitted as security for a fixed proportion of contributions owing to a plan, and for a maximum period of time, provided they are enforceable by the plan and immune from inclusion in the sponsor's estate in the event of insolvency. The Superintendent should have no power to relieve against these requirements either before or after the fact.
After five years, experience with letters of credit should be reviewed by the regulator. If no difficulties are found, they should be made available as a permanent feature of pension funding in Ontario.
The City does not support the implementation of Recommendation 4-15 of the Report, at least not at a threshold of 95%, on the basis that the City believes that this proposal does not adequately address plan sponsors' current concerns regarding funding the solvency deficiencies. A threshold of 80% and the extension of the normal amortization schedules from five to 10 years on a temporary basis would, however, be supported by the City. In this regard, the City echoes the Report's statement that there is no "one size fits all” solution to the funding of pension plans in Ontario. While the Report focused on tailoring potential funding schemes based solely on differences in plan designs, the City submits that the Government should consider providing a range of solvency funding options on the basis of differing circumstances rather than plan designs. In particular, the City submits that the Government implement solvency funding relief targeted at municipal pension plans.
With respect to Recommendation 4-22, the City notes that letters of credit may not be practically accessible to municipal employers. Instead, the City urges the Government to consider options not discussed in the Report.
Experience In Other Jurisdictions
Nova Scotia, New Brunswick, and Quebec have introduced legislation providing relief from solvency funding to pension plans sponsored by municipal employers. The measures adopted in each jurisdiction vary, but the objective appears consistent – to exempt municipal employers sponsoring pension plans from the strict application of the existing funding rules so that such employers are not required to make large special payments to their pension plans.
In 2006, Nova Scotia amended the regulations under the province's Pension Benefits Act with respect to the funding of solvency deficiencies arising under pension plans sponsored by a municipality. Essentially, if a municipal pension plan has a solvency deficiency that arises between August 30, 2006 and August 30, 2016, the pension plan is no longer required to pay off the full deficiency within five years. Instead, the municipalities are only obligated to fund their pension plans to 85%, on a solvency basis, within five years. If a municipality taking advantage of this relief amends its pension plan and the solvency ratio of the pension plan is negatively affected, the full cost of the amendment must be paid at the time the amendment becomes effective. Also, the amended provisions require that in the event the plan is partially wound up all solvency deficiencies with respect to the partial wind up must be paid immediately.
In New Brunswick, the province amended the solvency funding rules to permit a municipality to fund a solvency deficiency over 15 years instead of five years. However, in order to qualify for the extension of amortization periods, a pension plan was required to file an actuarial valuation, certify that sufficient assets existed to meet cash flow requirements during the relief period and provide members, former members and other affected individuals with a detailed notice of the intention to seek the extension of amortization periods.
In 2005, New Brunswick again amended the regulations under the province's Pension Benefits Act to provide that pension plans sponsored by municipal employers are exempt from making solvency deficiency payments. However, this relief is subject to two conditions. First, 51% of members and plan beneficiaries must consent to the application of the municipal employer. Second, if a municipality taking advantage of this relief amends its pension plan and the solvency ratio of the pension plan is negatively affected, the full cost of the amendment must be paid prior to the effective date of the amendment.
Quebec has also amended its Supplemental Pension Plans Act to provide temporary solvency funding relief. Bill 102 extended the amortization period for funding solvency deficiencies from five to 10 years. Pension plans permitted to take advantage of the relief were those (1) where the deficiency was funded by a letter of credit; (2) in which 70% of active and inactive members consented to the extension; or (3) the pension plan was sponsored by a municipal or university employer. In the latter case, the consent of plan members and beneficiaries was not required.
Beyond Nova Scotia, New Brunswick and Quebec, both Alberta, and Newfoundland and Labrador have exempted the multi-employer pension plans for municipal employees in those provinces from the solvency funding rules. Alberta provided a total exemption from solvency deficiency funding to its public sector pension plans regulated under the Public Sector Pension Plans Act, which includes the Local Authorities Pension Plan.
In Newfoundland and Labrador, the Newfoundland and Labrador Municipal Employees Benefits Inc. Pension Plan was exempted from making payments toward its solvency deficiency as at December 31, 2005, for the period January 1, 2006 to December 31, 2008. Further, other jurisdictions have adopted specifically-targeted measures providing relief from solvency funding to other employers such as universities.
Over the past few years, these jurisdictions have recognized the unique position of municipal employers who sponsor pension plans as compared to private companies. The various forms of solvency funding relief discussed above continue to protect the interests of plan members and beneficiaries while also providing flexibility to municipal employers who are ultimately funding the pension plans with tax dollars.
Tailored Relief Solvency Funding Relief for Municipalities
Other jurisdictions in Canada have enacted regulations aimed at relieving municipal plan sponsors from funding their pension plans on a solvency basis. Such regulations recognize the unique position of municipal employers compared to private employers, as a municipal employer will only be able to fund a special payment by diverting more tax dollars into the pension plan than is required to fund the plan on an ongoing, or going concern, basis, while not being subject to similar concerns regarding ongoing viability of the municipality as an employer.
The Report recognizes that funding is not a "one size fits all” proposition. However, it is important to acknowledge the unique position of municipal (or other public sector employers) plan sponsors. We respectfully submit that the Government pass legislation providing relief aimed not only at protecting the short-term viability of the pension system as a whole, but also legislation specifically targeted at relieving the stress municipalities sponsoring pre-OMERS pension plans experience, at the cost of scarce tax dollars diverted from other municipal needs. Other jurisdictions in Canada have enacted regulations aimed at relieving municipal plan sponsors from funding their pension plans on a solvency basis, recognizing the unique position of municipal employers compared to private employers, as a municipal employer will only be able to fund a special payment by diverting more tax dollars into the pension plan than is required to fund the plan on an ongoing, or going concern, basis.
The pension plans sponsored by the City, like those of many other employers, have been adversely affected by the global market downturn. However, the City must utilize tax dollars to fund any additional obligations under its pension plan resulting from market conditions. At the same time, the City and other municipalities are not at the same risk of closure, bankruptcy, or a winding down of operations as are private sector organizations.
Alternative Option for Solvency Funding Relief for Municipalities:
The City suggests the following alternative option for solvency funding relief, for municipalities who provide non-OMERS pension plans (City of Toronto, City of Ottawa and City of Hamilton):
The Funding Threshold for Municipal Pension Plans to be set at 80%:
The City believes that the most appropriate form of solvency funding relief that would benefit pension plans sponsored by municipal employers would be to establish a funding threshold below 100%. Solvency deficiencies would continue to be funded over a five year amortization period, however, funding would only be required up to the established threshold. This would reduce the amount of special payments required for pension plans that are funded under the threshold, and would also eliminate the requirement for special payments if the pension plan is funded at a level between the newly established threshold and 100%.
Similar to the regulations enacted in Nova Scotia, the City is cognizant that such relief should not be without conditions. The City submits that it would be appropriate to require a municipality taking advantage of this relief to pay the actuarial cost of an amendment to the pension plan prior to the effective date of the amendment, if the amendment adversely affects the solvency ratio of the pension plan. Given the conditions related to downside risk, notice should be provided to all members and plan beneficiaries, but consent should not be required as a condition of obtaining the relief.
The City further submits that the appropriate threshold for funding, taking into account the current economy and market experience, would be 80%. Establishing a funding threshold at 80% would continue to require pension plans that were likely in deficit positions prior to the market downturn to make special payments in respect of a solvency deficiency, but only up to the 80% threshold. Conversely, pension plans that were in a strong solvency position prior to the market downturn would not be required to make special payments if their pension plans continued to be funded above an 80% solvency status.
While the City stresses the need for relief targeted to pension plans sponsored by municipal employers, we believe that the options presented below would also provide meaningful relief to all plan sponsors in Ontario.
10 Year Solvency Funding Relief
In addition, the City wishes to comment on the relief contemplated in the Government's news release and Backgrounder, released December 16, 2008. This relief is consistent with, relief provided by the Federal government, Newfoundland, Manitoba, Alberta and proposed by Saskatchewan, temporarily extending amortization periods from five to 10 years for plan sponsors who file an actuarial valuation revealing a solvency deficiency after September 2008.
However, the City submits that municipal sponsors should be exempt from the requirement of obtaining the consent of members and beneficiaries of the plan. Given the purpose of providing such relief being the protection of the short-term viability of the pension system, requiring the consent of members and especially former members is overly burdensome on plan sponsors.
The City further submits that plan sponsors taking advantage of this relief should not be permitted to make benefit improvements to their plans during the relief funding period, unless any solvency deficiency caused by such improvements is funded in accordance with Regulation 909, over five years. The City would not support the accelerated funding of amendments providing benefits improvements under this option.
Efficient and Equitable Surplus Distribution Rules – Comments on Report Recommendations
Recommendation 4-16 — If a single employer pension plan is in surplus on being wound up, the surplus should be distributed in accordance with the plan documents unless the parties agree, or the proposed Pension Tribunal of Ontario rules, that the documents are not clear. In the event of such an acknowledgement or ruling, the sponsor may propose a scheme for the distribution of surplus, which would take effect if approved in one of two ways:
If the sponsor and the representative negotiators cannot reach agreement, they should submit the matter for determination to a dispute resolution procedure of their own choosing. If they cannot agree on such a procedure, or if it does not resolve the matter within a reasonable time, any party may apply to the Superintendent to refer the matter to the Pension Tribunal of Ontario, which would then establish the terms of the surplus distribution agreement.
Any scheme approved by secret ballot, any surplus distribution agreement reached by representative negotiators, and any determination by the Tribunal or an agreed dispute resolution procedure would be final and binding on the Superintendent and on all persons claiming to be entitled.
The City supports Recommendation 4-16, as it reflects the practice that plan sponsors and member representatives have adopted to effect surplus sharing under the current rules. The City supports the concept that the plan documents should govern surplus entitlement. More importantly, where the plan documents clearly provide entitlement of the surplus to the plan sponsor, the plan documents should govern and the plan sponsor should not be required to share the surplus with plan members.
The procedure for distributing surplus set out in Recommendation 4-16 for circumstances where the plan documents are not clear, as is often the case for mature plans with historical documentation that has changed over time, is also supported by the City. Recommendation 4-16 sets out a dear process under which a plan sponsor and plan members may come to an informed agreement to share the surplus that would then be paramount to the provisions in the plan documents. The recent Financial Services Tribunal (the “Tribunal”) decision in Montreal Trust Company of Canada v. Superintendent of Financial Services Commission of Ontario ("Montreal Trust') also supports the proposition that an agreement between a plan sponsor and plan members should be paramount to potentially conflicting language in historical plan documents.
The City urges the Government to amend the Pension Benefits Act to clearly adopt the process set out in Recommendation 4-16, expressly permitting plan sponsors and members to reach such agreements that will be respected by the Superintendent. Where the parties reach an agreement, the Superintendent should be required to approve of any subsequent amendments to the plan language that would permit the facilitation of the agreement. The City supports the recommendation to make such agreements binding on the Superintendent, who should not be permitted to override a mutually agreed upon surplus sharing agreement that is reached between the parties through negotiation.
The City further supports the adoption of the dispute resolution mechanism set out in Recommendation 4-16, for instances where the parties cannot reach an agreement. Currently, plan sponsors and members have adopted a process under which the parties utilize the class actions procedure to obtain the courts' endorsement of a negotiated settlement where plan documentation does not clearly provide entitlement to any party. While this process is working, as evidenced by the Tribunal's acceptance of the court decision in the Montreal Trust case, it is not entirely predictable or free from uncertainty. Using the class action process can prolong the resolution of surplus entitlement and often entails significant costs which are borne either by the plan sponsor or are deducted from the surplus to be distributed.
The introduction of a dispute resolution system under which the parties apply to the Tribunal (or a successor entity) will enable timely resolutions to surplus entitlement disputes, without the costs incurred under the class actions process. Thus, both plan sponsors and members are equally benefited by the adoption of this recommendation. Again, the City supports the recommendation that the decisions of the Tribunal setting out the surplus sharing agreement would be final and binding on the parties, subject to the potential for judicial review.
The City views Recommendation 4-16 as a benefit to both plan sponsors and members that the Government should adopt. While the current economy has changed the focus to the funding of deficits, some plans remain in surplus positions. More importantly, once the current crisis has passed, pension plans will rebound and the surplus distribution issues of the recent years will arise again. The Government should amend the Pension Benefits Act to provide fair and efficient means of distributing surplus, which the Report does an admirable job of developing.
Ensuring Accuracy of Beneficiary Lists
Finally, the City urges the Government to provide access to the Provincial Death Registry to provide plan administrators with greater means of ensuring the accuracy of their beneficiary lists. The Report addresses the issue of "stranded pensions" and "lost" beneficiaries throughout Chapter Five. However, the Report does not address, in any detail, the ongoing issue affecting all pension plans that must verify that the right individuals are receiving payments under the plans.
For example, survivors of deceased pensioners do not always notify the plan administrator of the pensioners passing, resulting in the continuation of the pensioners pension instead of an adjustment to a survivors pension. This often requires the plan administrator to seek recovery of the overpayments from the surviving spouse. In some cases, a pension plan may not receive notice that a survivor has passed away and payments continue to be made to the survivor.
These are problems common to all pension plans in Ontario, particularly those plans with a mature membership such as the plans sponsored by the City. Plan administrators must undertake ongoing monitoring efforts to verify that pension payments are actually being made to the correct individuals so that the plans do not bear unnecessary costs. One of the most efficient means of facilitating this ongoing monitoring would be to provide access to the Provincial Death Registry.
Currently, pension plans in Ontario are not permitted to use the Registry to verify the accuracy of their beneficiary lists. Other jurisdictions, such as Alberta, provide access to vital statistics and records for plan administrators searching for beneficiaries. The City recommends that the Government should provide plan administrators in Ontario with access to the Registry, at little or no cost, to enable the efficient and accurate management of plan beneficiary lists.
Given the significance of the above submissions, we would appreciate the opportunity to have an open dialogue with the Government, with particular focus on the need for solutions targeted at relieving solvency funding for municipal employers as well as for all plan sponsors in Ontario. My contact for this issue is Celine Chiovitti, Acting Director, Pension, Payroll & Employee Benefits. She can be reached at email@example.com and (416) 397-4143.
Original signed by
Joseph P. Pennachetti
c. Mayor David Miller
Cam Weldon, Acting Deputy City Manager and Chief Financial Officer
Celine Chiovitti, Acting Director, Pension, Payroll & Employee Benefits