in regard to
The Report of the
Ontario Expert Commission on Pensions
Canadian Union of Public Employees
CUPE is the voice of nearly 200,000 public sector and public service workers in Ontario – people who work on the front lines in hospitals, municipalities, utilities, long-term care facilities, social service agencies, schools and universities. As members of dozens of different Ontario pension plans in both the public and private sector, CUPE members have substantial first-hand experience and knowledge to contribute to the work of the Expert Commission on Pensions (“the Commission”).
The Canadian Union of Public Employees (“CUPE”) is a national union with 590,000 members who work in a wide range of occupations in the public, broader public and private sectors across Canada.
Our members are vitally concerned about decent retirement incomes, not only for themselves, but for others who may not yet have secured access to a good pension plan. And, as a union, we have had broad and deep experience with a number of different types of pension plans, in every Canadian jurisdiction.
We also recognize that the financial and economic developments of the past several months post-date the Report of the Ontario Expert Commission on Pensions (the “Expert Commission”) and that the Government, as well as governments from other jurisdictions, have already announced measures to address the immediate crisis that now faces the private occupational based pension system. Our comments in this submission are directed, as you have invited, to the Report, but we also believe that the implementation of the Report will necessarily be influenced by current events and by the funding relief measures that Governments have recently announced.
II. CUPE’S GENERAL POSITION IN REGARD TO THE REPORT
Overall, CUPE welcomes the Report, and believes that it underscores the necessary direction for change in Canada’s private occupational pension system. Pension reform has been very difficult and complex to organize in every Canadian jurisdiction, and the publication of expert reports across the country has now created an environment in which pension reform is possible. CUPE endorses the need for reform and will continue to play an essential role in protecting members’ interests as the reform processes unfolds.
Over the past decades, pension reform has been attempted on a limited and piecemeal basis, sometimes at the behest of employer-side lobbyists. This has not been successful, nor will this sort of initiative be successful in the future. By contrast, the Report has taken an overall view of the entire pension system, and has approached it within the broader context of labour relations. The Report has formulated a number of high level trade offs that may allow the system as a whole to move forward, but only if the Report’s recommendations are implemented as a package, and in a careful and balanced way.
In this regard, recently announced funding relief measures in Ontario and elsewhere have been primarily for the benefit of employer sponsors. While we recognize the severity of current economic circumstances, we are also mindful that any deterioration of funding standards jeopardizes our members’ future retirement income security. Accordingly, given the accelerated rate at which funding relief measures are being implemented, it is urgent that counter-balancing measures to improve coverage, and secure retirement income security, also be implemented with dispatch.
Finally, the Report, as well as current economic and financial circumstances, compels a focus on the basic question as to whether private, employer based pension plans are the appropriate mechanism to deliver retirement income to Canadians.
In Canada, we have a three tiered retirement income system, consisting of the Old Age Security (OAS) benefit and the Guaranteed Income Supplement (GIS) (tier one), the Canada Pension Plan (“CPP”) (tier two) and private tax assisted retirement savings plans and RRSPs (tier three). Recent reforms have put the CPP on a solid path to deliver retirement pensions to all working Canadians. The CPP is not in crisis, and forms the backbone of retirement income security in Canada.
By contrast, the private sector tier three pension system is now very much in crisis, with no easy solutions at hand. In this regard, we agree with the Report (Recommendations 9-4 and 9-5) that now is the time to consider an expansion of the CPP and that a summit of Canadian political leaders to consider the implementation of CPP reform should be an immediate priority.
III. SPECIFIC RECOMMENDATIONS
(a) Different Approaches to Regulation and Funding for Different Pension Plans
An important thrust of the Report is that different pension plans require different forms of regulation and different funding rules. In this regard, the Report recognizes that multi-employer plans make a very different kind of retirement income promise than the promise made by single employer sponsored plans, because of the different nature of the promise, different funding and minimum standard rules are appropriate for the two different types of plans.
In the same vein, the Report recognizes that jointly sponsored and jointly administered plans can approach risks differently than plans in which the employer is both the sponsor (responsible for funding) and the plan administrator (responsible for retirement income security). In jointly sponsored arrangements, both the employer and the members have explicit risk bearing roles, and both accept the consequences, good and bad, of their investment and administrative decisions. Where risks are shared, and where the responsibility for making risk based decisions is shared, the Report recommends a greater scope for risk taking decisions, especially in regard to funding, than for plans in which employers unilaterally decide on the risks to be taken with members’ retirement income security.
CUPE endorses the Report’s conclusion that a single set of pension funding rules is not appropriate for all pension plans. In this regard, CUPE agrees that it is of fundamental importance that Ontario Pension Benefits Act (“PBA”) be recast with separate and distinct funding rules for single employer sponsored pension plans, jointly sponsored pension plans and multi-employer pension plans. It will also be essential to a new funding regime to impose strict funding standards on plans where the employer determines to retain sole and exclusive sponsorship, and sole and exclusive responsibility for administrative and investment risk-taking decisions.
We have seen, over the course of the last decade in particular, that employers have decided to invest pension plan assets under their exclusive control in increasingly risky investments, the consequences of which are only too plain to see in the enormous pension funding deficiencies we see today. Where employers take these risks on behalf of the pension plans they are administering, they must do so only subject to the strictest regulatory oversight. By contrast, where a pension arrangement is jointly sponsored and jointly administered, such that member representatives and employer representatives together make decisions that affect the retirement income security of plan members, there should be greater scope for making risk-based decisions. A decision, for example, to sponsor a pension plan funded only on a going concern basis is a decision that joint sponsors can take together, knowing that the collective price for any collective mistake is collectively higher contribution rates. By contrast, a single employer sponsor, with an eye to cost rather than benefit security, should not be in a position to force members to assume undue funding or investment risks.
By the same token, and for the same reasons, CUPE supports the Report’s conclusion that solvency valuation standards be strengthened, and that the regulations require the funding of a provision for adverse deviation (“pfad”). The Report recommends a pfad of five percent, but we would urge that this amount may not be sufficient in view of the high levels of volatility and uncertainty currently in evidence in financial markets.
(b) Benefit Security - Corporate Insolvencies
CUPE endorses the Expert Commission’s recommendation 6-7 that the Ontario Government initiate discussions with the federal government concerning the possibility of amending the federal Bankruptcy and Insolvency Act to extend a priority in bankruptcy for the amount of a solvency deficiency or unfunded liability. It is a public policy priority that pension promises be kept – this is important for the individuals concerned and their families and communities, and is also important for the stability of labour relations. Benefit security is in jeopardy when an employer becomes insolvent, especially where the associated pension plan is not fully funded. This risk to benefit security is bound to increase as a result of the temporary funding relief measures introduced by the Ontario government in response to the economic crisis. If pension funds are required to permit employers to amortize their pension debts over extended periods of time, then it is urgent that any such additional credit be fully secured by a charge under the Bankruptcy and Insolvency Act.
(c) Ontario Pension Agency
CUPE endorses the establishment of the Ontario Pension Agency (the “Agency”) as a public sector vehicle to address labour mobility and pension portability problems (Recommendation 5-2). At this time, members who terminate their employment or membership in a occupational pension plan can either leave their entitlement in the plan, can transfer it to a new plan (but only if the new plan will accept the transfer), or can transfer a lump sum to some form of locked-in retirement account. Unfortunately, personal retirement accounts have become extremely expensive for members to administer, as the expense levels in the Canadian mutual fund and financial sector are very high. Accordingly, a new, independent government agency to receive funds that are transferred when a member terminates their participation in the pension plan would be a great advantage to the overall pension system.
(d) Enhanced Regulatory and Adjudication Mechanisms
CUPE agrees that Ontario’s regulatory and pension tribunal mechanisms require considerable upgrading. Pension regulators require more resources, and must be more proactive. We have seen an upsurge in the number of insolvencies of companies with underfunded pension plans. A crucial role of an enhanced regulator should be to proactively monitor such employers, and to take steps to ensure that their pension plans are as fully funded as possible at all times. Pension regulators require the power and the resources to monitor employer financial health, and to take remedial steps to improve pension funding where members face the risk of pension plan wind-up.
As well, the current Tribunal, composed as it is of part-time members with ongoing clients and business interests, is not an appropriate body to supervise the pension regulator. It is important that the Tribunal be as qualified and as independent as possible. These requirements suggest a smaller, full time Tribunal in lieu of the current part-time structure. In CUPE’s view, it is very important that the Tribunal includes at least one member appointed by an Ontario trade union, and a second member appointed by the employer-side.
(e) Phased Retirement
The labour movement continues to have serious concerns about phased retirement and the maximum provisions outlined in the Income Tax Act.
With the combination of short pensionable service and the continued lag in wage rates for women, access to any model of phased retirement will be limited for many workers especially women. With the current lack of portability options and costly buy-back provisions, many workers continue to be unable to build an adequate level of pension benefits over their working lifetime and hold little chance of taking up any model of phased retirement. We are also strongly opposed to any notion that access to phased retirement benefits can be offered to a select few with “written agreement between the employer and the employee”. All phased retirement options should be open to all plan members who meet objectively defined retirement related criteria.
(f) Indexation and Plan Conversions
Defined benefit plans are of value to their members because they provide a predictable and secure retirement income. Ontario’s pension industry must strive to deliver pensions that are adequate, and that meet the objectives of security and predictability.
As we have seen in earlier decades, inflation can pose a serious threat to the predictability and security of retirement incomes. Accordingly, steps must be taken to ensure that all defined benefit pensions properly address the indexation of retirement incomes. In this regard, we are disappointed that the Report did not recommend mandatory indexation, or a mandatory formula that would apply in the event that inflation exceeds a certain threshold. We urge the Government to mandate inflation protection at least in accordance with the formula recommended by the Friedland Task Force in 1986.
As well, defined contribution plans fail to meet the tests of either security or predictability. The members who are worst affected by the current financial crisis are those who belong to defined contribution plans. The values of their retirement accounts have plunged, and there is no obligation on the employer to make up any part of their losses. Defined contribution plan members personally bear the risk of market losses, and personally bear the risk that interest rates will be low at precisely the time they purchase a retirement annuity. They are also unable to pool longevity risk. This type of plan should be discouraged. Conversions from defined benefit to defined contribution plans should be prohibited.
(g) Contribution Holidays
We are also disappointed with the Report’s approach to contribution holidays. As we know, financial markets are cyclical, with periods of high returns and other periods of low returns. Where employers take contribution holidays during periods of high returns, they simply leave their plans without a cushion, unprepared to deal with subsequent periods of low returns. The impact of contribution holidays on the subsequent emergence of unfunded liabilities is apparent to us in many situations. For this reason, we do not support the Report’s recommendation that contribution holidays be permitted where plans are funded in excess of 105% of solvency liabilities. Rather, we believe that contribution holidays should be prohibited entirely. In the meantime, we endorse the Expert Commission’s recommendation that all contribution holidays be fully disclosed.
For this reason as well, we endorse the Report’s recommendation that the federal Income Tax Act limits on surpluses be increased. This would recognize the cyclical nature of investment markets and the need to build up large cushions during periods of prosperity, in order to cushion the impact of subsequent downturns.
(h) Pension Benefits Guaranteed Fund
Ultimately, the security of members’ retirement incomes is a matter of significant public interest. It is in the public interest that promises made to provide retirement income are kept, because those incomes are important to the individuals to whom they have been promised, and because they are important to the communities in which those individuals live. It would not be conducive to good labour relations in Ontario for the defined benefit promise to be chronically uncertain or undependable.
As the Report has documented, the level of pension insurance provided by the Pension Benefits Guaranteed Fund (“PBGF”) has deteriorated very significantly in real terms since this insurance arrangement was introduced some twenty-five years ago. We therefore agree with the Report’s recommendations that the level of coverage by the PBGF should be considerably enhanced to the level of at least $2,500 per month. In this regard, we note that the level of protection provided by the Pension Benefits Guaranteed Corporation (“PBGC”) in the United States is considerably higher than $2,500 per month, and it is indeed, closer to $5,000 (Canadian dollars). We would therefore urge that the level of PBGF protection be increased immediately to $2,500 per month, with additional study of limits that are comparable to those provided by the PBGC in the U.S.
(i) Future Pension Reforms
Part of the difficulty in reforming pension laws in Canada is that we lack, in most jurisdictions, central employer entities that are capable of playing authoritative role in regard to pension reform. Instead, the interests of a wide variety of different employers tend to be articulated by actuarial firms, rather than by the employers themselves. We do not believe that this is constructive, or conducive to ongoing reform. Accordingly, CUPE endorses the creation of a Pension Champion, whose mandate would be to maintain a dialogue in regard to pension issues, and to focus general attention on the possibility for pension reform. CUPE also endorses the establishment of the Pension Community Advisory Council to bring stakeholders together for the purpose of ongoing discussions concerning the state of the pension sector.
(j) Socially Responsible Investments
CUPE endorses Expert Commission recommendation 8-23 that would require plans to disclose whether and to what extent they consider social, environmental and governance criteria in their investment decision-making. These factors are material for pension funds as long term presence in the economy, and are also vital to the communities in which they operate. Pension funds that are narrowly focused on maximizing short term returns will not perform well for their members over the longer term; it is therefore important that pension funds disclose all of the criteria they use to invest pension monies.
In conclusion, we commend the Government for having established the Ontario Expert Commission on Pensions. We believe that it provides the first comprehensive and balanced overview of the occupational pension system in Canada for many decades, and we look forward to working with the Ministry and other stakeholders on the implementation of the Report’s recommendations in a balanced and fair way.