Response to the Ontario Expert Commission on Pension Report by the International Association of Machinists and Aerospace Workers (IAM)
The IAM represents over 10,000 workers in Ontario, in both the Ontario and federal jurisdictions, most of whom are members of registered pension plans. We presented our views to the Expert Commission, and are pleased to have the opportunity to respond to the Commission's Report.
We hope that the Government will follow the lead offered by the Commission – that it will amend the Pension Benefits Act and make other changes in the regulatory regime in a balanced way, emphasizing fairness and enhanced pension security. It is in this spirit that we respond to the specific recommendations of the Commission.
Recommendations 4-1 and 4-3 call for more transparency in the preparation of actuarial valuations. It would be useful to move towards a formal, publicly-available valuation policy for each plan, explaining funding choices within the regulatory framework, including contribution holiday policy.
Enhanced powers for the Regulator to direct actuarial practices (Recommendation 4-2) would be useful, but the Regulator must have the resources to effectively monitor the system (Recommendation 4-6). This is also important with respect to Recommendation 4-17, where the Regulator must be able to estimate when a SEPP's solvency ratio has fallen below 95%, so that contribution holidays are immediately stopped.
We agree in general that different kinds of plans – SEPPs, MEPPs and JSPPs, - should be allowed different funding rules, though it must be remembered that pension security is as important for members of MEPPs and JSPPs as for members of SEPPs.
It is reasonable to allow MEPPs and JSPPs to fund only according to going-concern valuation (based on the 2007 SOMEPP regulation limits), but we agree that the continuing requirement to perform solvency valuations will provide important signals if plans are courting danger.
With respect to the funding of SEPPs, the security margin of at least 5% must be required before contribution holidays can be taken, (Recommendation 4-14). A further measure of protection would be provided if contributions were made subject to member and beneficiary agreement as required for surplus withdrawals. Allowing 8 year solvency funding when a plan is above the 95% funding level (Recommendation 4-15) adds a relatively modest increase in risk.
Recommendation 4-16 would largely enshrine the current, reasonably-well-functioning system of surplus distribution on windup, based on a deal struck between the various parties. It reflects a recognition that risks in a Defined Benefit pension plan are shared, and access to surpluses should therefore also be shared. It is important that the deal-making process have clear time limits and final binding arbitration, if necessary.
Recommendation 4-18 would allow somewhat easier sponsor access to plan surplus in an ongoing SEPP, where the solvency surplus is in excess of 25%. This is not unreasonable if the plan sponsor is required to obtain consent of the 2/3 of plan members (or the union), but we have some concern that the Regulator's view of "clear plan documents" may put plan members and other beneficiaries in a severe disadvantage in this process.
With respect to indexation, we do not understand the reference in Recommendation 4-21 to "Inflation Emergencies." Over the 15, 20 years or longer that most retirees draw pension, even relatively low cost of living increases seriously erode purchasing power. For example, over the relatively stable 1992-2008 period, where annual inflation never reached 3%, the real value of non-indexed pension fell by 26%. We believe that the government should bring forward a regulation that would require at least partial indexing at all times. This would also allow for the development of a stable funding regime for these requirements.
With respect to the use of Letters of Credit and Asset Pledges (Recommendations 4-22 and 4-23), we have doubts that safe and irrevocable instruments will be available to those sponsors most in need of them, and are particularly concerned about the Regulator's ability to effectively monitor these instruments.
While we agree that the Government should urge the federal government to increase the funding limits under the federal Income Tax Act (Recommendation 4-24), we are concerned about Recommendation 4-25, which calls for further deregulation of pension investment. We believe, in the light of recent revelations of the complexity, opacity and lack of understanding that permeate investment – particularly within "large and sophisticated" financial institutions, including large pension funds – that greater, not less, regulatory oversight is needed.
In related vein, we are concerned about Recommendation 8-8, which would exempt from the 30% investment rule plans which have both joint governance and analytical capacity. We are skeptical on two grounds – that governance is truly shared in all such cases(there are often many interests represented "at the table" but without effective powers) and we have seen too many cases in recent years where a supposedly high level of analytical capacity without transparency and regulatory oversight has wrought financial disaster.
We can see advantages in the setting up of an Ontario Pension Agency (Recommendation 5-2) to give terminating plan members another option, if the Agency actually provides plan members with a better "deal" (particularly in terms of fees) than current RRSP providers. We are very interested in participating in the discussion of how such an extension of the public pension system might effectively operate.
We believe that the extension of "grow-in" provisions to all terminating SEPP members (Recommendation 5-8) would not only provide equity, but would lessen the likelihood of disputes over full or partial wind-ups.
Limiting the grow-in to "involuntary quits" is, however, highly problematic. It is frequently unclear whether termination is voluntary, particularly in large scale restructurings or shutdowns. Pension legislation does not generally differentiate between voluntary and involuntary terminations, and it not an issue in which the Regulator has any special competence to adjudicate. Attempting to differentiate better voluntary and involuntary quits would lead to an endless procession of "constructive dismissal" cases – adding to cost, complexity and inequity.
The grow-in provision should not be limited in this way. The age and service requirements limit the risk that large numbers of people will voluntarily terminate employment simply to take advantage of the grow-in. In any case, solvency valuations and funding requirements already reflect a general application of the grow-in rule, so no new solvency funding burden would be placed on SEPPs.
Immediate vesting (Recommendation 5-11) is an important step in bringing greater fairness to even short-service plan members, and is a recognition that pension benefits have (explicitly or implicitly) been bargained for from the first day of employment.
Recommendation 5-12 would remove the current requirement that surplus be distributed on partial wind-up ("Monsanto"). While this is not unreasonable as a trade-off for the proposed limits on the use of surplus, we would urge the Government not to attempt to introduce retroactive application of this change, which would take away the rights of former plan members and retirees accrued under the legislation over the last 20 years.
Recommendations 5-14, 5-15, and 5-16 would specify the level of downsizing which brings about a full and partial wind-up. If there is immediate vesting, general grow-in rights and no requirement to distribute surplus on partial windup, the windup exercise is likely to be less contentious than it has been. It is important to continue partial windups if only to require the filing of a report which would allow the sponsor and regulator to assess the ongoing viability of downsized plans.
Recommendations 5-17, 5-18, 5-19, 5-20, 5-21 and 5-22 would essential open up the full use of surplus to plan sponsors in splits and mergers. The law in this matter is currently somewhat ambiguous. The Commission recommends that plan members be allowed to discuss and negotiate, but not in any effective way to even delay the employer's appropriation of surplus on splits and mergers. We believe that, consistent with the general recommendations on surplus, that member and beneficiary agreement, with time-limited binding arbitration as a final step, be required before surplus is transferred in splits and mergers.
Recommendations 6-1, 6-2, 6-3, 6-4, 6-5 and 6-6 would give the Regulator extended authority to identify and act on plans deemed to be at risk. For these powers to be meaningful, the Regulator must be given sufficient resources to actively monitor and intervene in situations where benefits are in danger.
We support Recommendation 6-7 which calls on the Government to work to increase the priority of all pension claims in federal bankruptcy legislation. As in other areas, if the Regulator is to be given increased authority to act on behalf of plan members, it must also be provided with the necessary resources.
We strongly support Recommendation 6-17 to update the maximum benefit coverage of the Pension Benefit Guarantee Fund, and are prepared to participate, along with other unions, in the process of analyzing and improving the administration and funding of the PGBF, as the Commission recommends.
The Commission puts forward the proposition that some elements of pension regulation (e.g., standards) are better dealt with through clear rules, while other areas (e.g., investment, governance) are better governed through general principles. While it is always difficult to draw a clear line in these matters, we would state a preference, where possible, for the use of rules. Care should be taken in moving away from rules in areas like investment (as we have noted above) where monitoring and oversight is particularly daunting.
We would hope that there will be broad consultations on the specific legislative language being developed. "The devil is very often in the details", and changes in one area of the legislation might interact with, complement, or contradict its operation in other areas. Many problems can be avoided simply through wide public consultations.
While Recommendation 7-1 calls for the PBA and the Pension Regulator to be made the all-inclusive, "one-stop-shopping" authority on pension matters, this is not always possible. There will inevitably by overlapping jurisdiction with areas like family law, labour standards and labour relations, bankruptcy and income tax legislation. In legislative drafting, there should be an explicit effort to limit the scope of overlap, by not importing concepts better dealt with in other areas (as, for example, the notion of "voluntary quits" discussed above).
While we have generally found FSCO staff to be open and cooperative (particularly in comparison with some other Canadian pension regulators), we concur with Recommendations 7-13 calling for the establishment of a complaints officer.
Codifying the right of representation for unions and other member representatives to participate in regulatory proceedings (Recommendation 7-14) is important. There should be some leeway given in terms of process – i.e., it would not make sense to require an appeal tribunal to give full legal standing at a hearing to every individual who might have a potential interest or claim in the matter at hand.
We endorse Recommendations 7-20, 7-21, 7-22 and 7-23 to form a separate Pension Regulator with an expanded role and budget. As we have already said, the Regulator must have the resources to do the job.
The success of the Pension Tribunal proposed in Recommendations 7-26, 7-27, 7-28, 7-29, 7-30 and 7-31 will depend on its members being clearly seen to represent an equal balance of member/union and management backgrounds. The selection process, particularly for the member representatives, is therefore an essential element in creating and maintaining the legitimacy of the Tribunal.
We concur with the Commission's desire to more actively involve unions in plan governance in SEPPs, MEPPs and JSPPs, but employers are rarely willing to voluntarily cede authority, even in joint-sponsorship and joint-trusteeship situations. It should not be assumed that "jointness" necessarily means shared control.
Recommendation 8-5 would require JSPPs and MEPPs to disclose annually "known events likely to lead to a reduction in benefits". It is not clear how far these plans would have to go in describing hypothetical changes. For example, if there is a possibility of an employment downturn affecting benefits in a JSPP, would the plan be required to notify members of hypothetical future reductions? Would this serve a useful purpose, or cause confusion and possibly panic? How would this requirement interact with public companies' obligations for equitable public disclosure to shareholders?
We are eager to participate in the consultation processes outlined in Chapter 8 of the Commission Report to develop policies on governance, conflict of interest, training, etc. and the discussions envisaged for the Community Advisory Council recommended in Chapter 10.
We also would like to be part of the discussion with respect to expansion of public pension system. We believe that the most effective and efficient means to improve the retirement incomes of most Ontarians is the expansion of the Canada Pension Plan, and we hope that the Ontario Government will work towards that goal.
We look forward to participating in an ongoing public process to update and improve the pension system in Ontario.