February 26, 2009
To: The Honourable Dwight Duncan, Minister of Finance
c/o Pension and Income Security Policy Branch
Attention: Comments on Report of the Expert Commission on Pensions
Via e-mail: Feedback@ontario.ca
Re: Ontario Expert Commission on Pensions Report
Imperial Oil welcomes the opportunity to respond to the report of the Ontario Expert Commission on Pensions (OECP), which was issued on November 21, 2008.
Background & Perspective
Imperial Oil operates four DB pension plans in Canada - one for itself and three on behalf of affiliated companies that are wholly-owned subsidiaries of ExxonMobil Corporation. These plans cover a total of over 7000 active employees and 12,000 annuitants and pension survivors. Two of these plans are registered in Ontario, one in Alberta and one in New Brunswick, and all but one of them have members in more than one jurisdiction. We also operate three DC arrangements for the ExxonMobil affiliates (although these are now closed to new members), and savings plans for all four companies which include a group RRSP component. The Imperial Oil DB pension plan is registered in Ontario and is a relatively large and mature SEPP, having been in operation since 1919. We try to take the ‘long view’ in matters of pension regulation, and recognize the need to distinguish between the ongoing pension regulatory framework and whatever temporary measures may be deemed appropriate in the current economic climate.
Our interest in the Ontario pension consultation stems not only from the number of members we have in this province and from the fact that Ontario is the ‘major authority’ for two of our plans. As a multi-jurisdictional plan sponsor, we are also concerned about the precedents which may be set for other provinces and the prospect of either a greater or lesser degree of alignment across jurisdictions. In our view, the fractured nature of the national pension framework has been one of the contributing factors in the erosion of pension coverage, insofar as multi-jurisdictional employers are concerned. Although we recognize the need for fundamental reforms to the pension system at this time, we sincerely hope that such reforms can be achieved while increasing the degree of harmonization across jurisdictions, not reducing it.
In this regard we were heartened to see the governments of Alberta and British Columbia working together on their pension consultation, with a view to harmonizing standards and developing joint regulatory and advisory bodies. We have encouraged these two governments to pursue harmonization with other jurisdictions as well. Similarly, as the Ontario government considers its actions in response to the OECP report, we strongly encourage it to resist the temptation to proceed independently. The OECP recommendations should be integrated with the results from parallel consultations, in particular the reports from the BC/Alberta JEPPS and the Nova Scotia Pension Review Panel. We note a number of areas of convergence in these reports, but even in areas where they differ, there is an opportunity to analyze the different perspectives and possibly arrive at a synthesis or combination, rather than focusing on the OECP recommendations exclusively. We support the inter-jurisdictional consultations on alignment of standards as contemplated in recommendation 10.7 of the OECP report.
Imperial Oil is relatively unusual among private sector corporations, in that we have decided to maintain a significant DB pension component in our employee benefits program over the past two decades. This conclusion was reached because our management believes this type of pension best meets the needs of employees and the company, within our 'career employment offer' and workforce planning model. However, we can understand why many other employers have decided to abandon DB designs, or in some cases wind up their registered pension plans entirely, given the complex, burdensome and fractured nature of the pension regulatory climate. We believe that it is both possible and necessary to remove certain elements in the current legislation that act as disincentives to the establishment or maintenance of DB pension plans, and that this can be done without undermining the benefit security of DB plan members.
In this regard we are deeply concerned that the OECP report appears to treat single–employer DB plans as a form of pension coverage that is obsolescent, or at the very least, inherently riskier and therefore in need of much stricter regulation and funding requirements. We do not share this view, even though we accept the common conclusion of the different pension reform consultations that legislation needs to expand to encompass different plan types that go beyond the traditional DB – DC dichotomy. While design types such as MEPPs and JSPPs clearly have a role to play, we hope that there will still be a viable place for SEPP – DBs in the pension system of the future. In particular we trust that the Ontario government will not attempt to force established SEPP – DB’s into one of the emerging models, e.g. by mandating their consolidation into sectoral MEPPs. Assuming that is not the intent, we suggest that although the OECP report does contain a number of positive recommendations, it could have done a good deal more to encourage and sustain DB designs, in particular by dealing in a more direct and definitive way with the so-called asymmetry issue. In regard to asymmetry (and several other issues), we believe that the Alberta / BC JEPPS report contains viable solutions, which should be considered by Ontario before regulatory reforms are undertaken.
We note that throughout the OECP report there is a consistent theme that joint sponsorship and joint governance can be relied upon to improve the stability of pension plans. This approach is favoured to such an extent that it is proposed to provide relaxed or more flexible requirements to MEPPs and JSPP’s in such matters as valuations, funding, and some entitlement items (such as grow-in benefits). In our view this philosophy overstates the value of joint governance relative to the importance of the underlying financial strength of the sponsoring employer. As the only industrial company in the country with an AAA credit rating, and a history of meeting our pension obligations for nearly a century, it does not seem reasonable to us that our company needs to be subjected to more onerous requirements than other employers who may be far weaker financially, but who happen to have a joint sponsorship arrangement with a particular union or other group of member representatives. We note that even a sector - wide approach to joint governance is no guarantee of member benefit security if the whole sector is in trouble, as the current situation in the auto industry amply demonstrates.
The OECP report inappropriately concatenates the joint governance concept with target benefit/ contingent benefit designs. It also reflects a traditional labour relations perspective, in which bilateral relationships between employers and unions are the norm. In our view this approach oversimplifies the multilateral relationships that typically characterize a large, multi-site, multi-jurisdictional enterprise, and it overlooks the practical difficulties of establishing and sustaining ‘joint’ sponsorship and governance structures in such an enterprise. We have relationships with multiple bargaining units of two different unions, several non-union employee representation bodies, and a large number of non-represented employees, at dozens of work sites across nearly every part of Canada. Our annuitant population is equally diverse and dispersed. In this context the question becomes: with whom are we to jointly govern?
We also question whether an increased member voice in the ongoing management of our plans would translate into more prudent governance, versus simply becoming a venue for ongoing attempts to negotiate benefit improvements.
Following are comments on a few specific areas in the OECP report, with a focus on those of interest to us as a long-standing multi-jurisdictional DB plan sponsor.
Recommendations 4.3, 4.13 – 4.18, 4.24, 4.25: Valuations, Funding, Surplus, Investments
We note that although a few of these requirements are less onerous than current standards, as a total packkage they are stricter and reflect a clear bias toward maximizing benefit security, rather than encouraging the expansion or sustainment of DB plans. As such, this approach can be expected to contribute to the further erosion of pension coverage generally, and DB coverage in particular, which would seem to be misaligned with the Commission’s original mandate. While we can live with these recommendations, as we share the belief that the 'pension promise' should be appropriately secured, in our view the quid pro quo should have been a much more direct and fundamental resolution of the asymmetry problem, similar to the proposed PSF’s and ‘ring-fencing’ provisions in the Alberta / BC JEPPS report.
We note that the proposed 5% solvency funding cushion, the requirement to be at 105% solvency funding before a contribution holiday is permitted, and the requirement to be at 125% solvency funding in order to withdraw surplus from an ongoing plan, will need to be reconciled with the current requirement in the federal Income Tax Act that generally forces contribution holidays at solvency ratios above 110%. We encourage Ontario to exercise its influence with federal authorities to increase this limit, as well as other excessively – prescriptive constraints in the ITA on such items as maximum benefits, contributions, and transfer values. And we support the proposition that quantitative investment rules in federal legislation are outmoded and need to be replaced, although we believe it is better to use principle-based regulation in this area (e.g. a generic ‘prudent expert’ standard - see JEPPS report) rather than create an Ontario-specific set of equally – prescriptive investment rules.
Recommendations 4.22, 6.16 - 6.18: Letters of Credit, PBGF Risk Assessments
We strongly support measures in the report that recognize the plan sponsor’s financial strength, including the optional availability of a letter of credit as a means of funding a portion of a solvency deficit. (We are not clear why a 5 – year trial is needed, since this approach has already been tested in other jurisdictions.) We also support the suggestion implicit in recommendation 6.16 that the sponsor’s financial strength be taken into account for purposes of calculating PBGF levies. However we continue to question the financial viability of the PBGF – especially if coverage is increased to $2500 per month -- and oppose in principle the taxing of reliable plan sponsors such as ourselves in order to subsidize the bad decisions or misfortunes of other sponsors. We agree with recommendation 6.18 that PBGF alternatives be explored.
Recommendations 5.8, 5.12 - 5.15: Partial Plan Windups & Grow-Ins
We support the proposed clarification of the triggering condition for a partial wind-up. It should be further clarified that the threshold of 40% within two years applies to the total plan membership, not just the portion of plan membership in Ontario or any other segmentation of the plan membership. The proposed threshold is vastly preferable to the existing criteria for partial windups, which are far too subjective and have resulted in numerous inequities between members terminating under a partial windup order and others in nearly identical circumstances who have not been subject to such an order. The existing partial windup provisions have also resulted in protracted disputes and litigation concerning their interpretation and application, particularly after the Monsanto decision and FSCO staff’s subsequent attempts to interpret the implications of Monsanto on this part of the PBA. The result has been a major irritant for existing DB sponsors and a clear disincentive to a prospective sponsor.
In our view the OECP report should have gone further and eliminated the concept of a partial windup entirely, as recommended in Nova Scotia and the Federal jurisdiction, and as has been implemented in Quebec. Failing complete elimination of the partial wind-up concept, we welcome the OECP recommendation that a partial windup order no longer trigger a requirement for immediate distribution of a share in a notional surplus. We also feel it is very important to discard the seriously-flawed concept of forced external annuitization, which not only adds to sponsor costs, but in our case arguably exposes member pensions to more risk than if they had been left in our plan, and runs directly counter to the express wishes of the affected members.
We do not believe that grow – in rights should be extended beyond divestment / successor employer situations. Extending grow-in rights using the 55 – point rule to all involuntary terminations would be a significant intrusion into the employer / employee relationship and would either add materially to plan sponsor cost and administrative complexity, or potentially create an increase in company - initiated terminations just prior to the 55-points eligibility condition. Either way this would be an unfortunate policy that would act as a major disincentive to the establishment and continuance of DB plans. It would be unique to Ontario, inequitable to plan members elsewhere, and would appear to signal that Ontario is not an employer-friendly place to do business.
Recommendation 5.11: Vesting
We do not support immediate vesting except in situations where a mandatory grow-in is at play. This is less an issue of cost than of administrative burden, since immediate vesting involves large amounts of administrative effort in early terminations where relatively small pension values are involved. We note that Quebec mandated immediate vesting (as Nova Scotia proposes to do) only after completely eliminating the partial windup concept. If immediate vesting is to be adopted, plan sponsors must be given discretion to settle small obligations with a cash commuted value and not be burdened with offering or administering other options.
Recommendations 4.20, 4.21: Indexing
We take no issue with clearly indicating in the plan text and member communications the nature of any promised indexation, or the lack thereof. However we strongly oppose any suggestion that mandatory indexing be imposed, particularly on the basis of such a nebulous concept as an “inflation emergency”. Our company, along with many other DB plan sponsors, has granted numerous ad hoc adjustments over the years in recognition of the impact of inflation on pensions. Our track record during the most recent period of high inflation in the 1980’s speaks for itself. However, our management values the flexibility to decide the timing and amount of such adjustments, without prescriptive interference from the government.
Recommendation 8.18-8.25: Governance
We accept the need for reasonable transparency, effective communications to plan members and sound governance practices in a SEPP, and can adapt to many of the related OECP recommendations, although we are skeptical that such measures as on-line availability of formal plan documents, detailed written policies on governance, funding and investments, or the provision of an expanded annual information statement will really make much difference to the average plan member. We also seriously question the value and the administrative practicality of the proposed pension advisory committees (PACs), particularly in an employer-funded SEPP - DB. As noted in the general comments section above, there are a host of difficulties associated with setting up and operating such a committee in a large multi-jurisdiction enterprise with a diverse mix of employee representation. We routinely have dialogue with our employee representation groups, various informal employee forums and our network of annuitant clubs about pension matters, and hope that such a central committee would not undermine these channels of communications.
We have not encountered issues associated with the lack of PACs during the past 90 years and question what value will be added, given that the OECP report is proposing to tighten up requirements, increase regulatory scrutiny and mandate more member notifications in a number of areas, including plan splits, mergers and conversions.
Recommendations 7.9 – 7.30: Regulatory Structures
We can support measures to reduce the occurrence of regulatory delays, and to clarify the powers and improve the capabilities of the regulator, appeals tribunal, proposed pension advocate, etc. Our own experience as a multi-jurisdictional plan sponsor is that Ontario has been the most difficult jurisdiction in which to administer our plans. However, we are concerned about the sheer amount of restructuring envisioned in the OECP report, and wonder how much temporary disruption such restructuring will entail. We also question the staffing and funding implications of these recommendations during a time of fiscal constraint.
Passport approach versus current MJPP Agreement
We note that the OECP report makes no mention of the so-called ‘passport’ approach to handling multi-jurisdictional plans, and therefore assumes the model of the current MJPP agreement, and the proposed renewal version of this agreement which is currently being proposed by CAPSA. That is unfortunate. We refer to the separate submission we have already made to the CAPSA consultation, and note with pleasure that the final report of the Nova Scotia Pension Review panel endorses the passport approach as a way to help reduce the regulatory burden on multi-jurisdictional sponsors. The Ontario government should strongly consider similar measures.
Thank you for considering our perspective as part of this significant pension reform consultation. After two decades of relative inaction during which pension coverage, particularly of the DB type, was seriously eroded for Canadians, this dialogue appears to be a historic opportunity to pursue needed reforms and greater harmonization at the same time.
Ken M. Smith
Manager, Pension, Savings & Benefit Plans
Imperial Oil Limited and ExxonMobil companies in Canada