February 17, 2009
The Honourable Dwight Duncan, Minister of Finance
Attention: Comments on Report of the Expert Commission on Pensions
c/o Pension and Income Security Policy Branch
5th Floor, Frost Building South
7 Queen's Park Crescent
Toronto, ON M7A 1Y7
Re: Comments on Report of the Ontario Expert Commission on Pensions
The Municipal Employers Pension Centre of Ontario (MEPCO) is a wholly owned subsidiary of the Association of Municipalities of Ontario (AMO) which has the responsibility for research, advice and liaison on matters related to the Ontario Municipal Employees Retirement System. We welcome this opportunity to comment on the report of the Ontario Expert Commission on Pensions, entitled A Fine Balance (Report).
In its submissions to the Ontario Expert Commission on Pensions (Expert Commission), we sought relief in three key areas that it viewed as relevant and potentially significant to the majority of its constituents that are sponsors of the Ontario Municipal Employees Retirement System (OMERS). Specifically, the submissions sought the following:
The Report specifically addressed both the issues of solvency funding and asset transfers, and addressed the issue of flexibility in the context of innovation. Set out below are our comments respecting these and certain other of the Report's recommendations that we see as having some bearing on OMERS, and which are believed to have the potential to significantly impact both OMERS' members and employers.
Funding issues are covered by chapter four of the Report. This chapter includes recommendations specific to single employer pension plans (SEPPs), multi-employer pension plans (MEPPs), and jointly sponsored pension plans (JSPPs).
Pursuant to section 3.2 of Regulation 909 to the PBA, OMERS has been prescribed as a JSPP. Accordingly, we are particularly concerned with the Report's recommendations respecting the funding of JSPPs.
The Report provides (at recommendation 4-11) that JSPPs should be required to fund only on the basis of going concern valuations.
The Report's recommendation to relieve JSPPs from solvency funding requirements is positive, and is in line with our submissions, OMERS, and many others made to the Expert Commission.
The Report's recommendation that JSPPs be required to fund only on a going concern basis, is supported and that the Ontario government immediately amend Regulation 909 to the PBA to relieve JSPPs from solvency funding requirements.
On the other hand, the recommendation is made subject to the condition that amortization periods be shortened, in accordance with the rules prescribed for Specified Ontario Multi-employer Pension Plans (SOMEPPs).
The SOMEPP regulation requires that SOMEPP going concern funding deficiencies be amortized over a 12 year period. Also, benefit improvements that drop the funded status below certain prescribed levels must be funded over 8 years. Non-SOMEPP plans are permitted to amortize going concern deficiencies over a 15 year period.
Based on OMERS' estimates, it is our understanding that OMERS sponsors could experience a significant increase in their near-term funding obligations if JSPPs are required to funding going concern deficiencies over a 12 year period. Specifically, OMERS has suggested that a 12 year amortization period could increase member and employer deficit funding requirements by approximately 15% to 20% in times of going concern deficit.
As a public sector plan, OMERS is not subject to the same risks as private sector MEPPs or SOMEPPs, and it is submitted that the imposition of tighter requirements for going concern valuations is unnecessary to protect OMERS benefits.
The proposal that JSPPs be funded according to going concern valuations that have shorter amortization periods is strongly opposed.
Chapter five of the Report, titled "Pension Plans in a Changing Economy", covers asset transfers. The Report recommends (at Recommendation 5-4) that individual and group transfers be facilitated between pension plans, by providing each transferee with four options respecting his/her accrued pension, as follows:
The Report also recommends (Recommendation 5-5) that the Ontario government promptly address the pension arrangements for groups of public service employees affected by past divestments and transfers, whether by allowing these groups to access the transfer options proposed above (in Recommendation 5-4), or by other means, including negotiations with their representatives.
In summary, the Report advocates for more permissive rules governing individual and group asset transfers, including transfers related to divestment situations. This is consistent with the submissions we made to the Expert Commission in 2007.
The Report's recommendations respecting asset transfers are supported, and we request that the Ontario government immediately amend the Pension Benefits Act to implement this recommended change.
Chapter nine of the Report concerns the issue of innovation in pension plan design, and suggests that innovations may be critical to the future health of Ontario's occupational pension system. In particular, Recommendation 9-1 of the Report states that innovation in plan design should be promoted and facilitated. The Report goes on to state that:
Legislation and regulations that inhibit innovation should be reviewed and revised with a view to enabling the introduction of plan designs not now permitted, if such designs meet criteria to be set out in the statute.
The PBA and the ITA impose certain constraints on plan design. An additional constraint, unique to OMERS, resides within the Ontario Municipal Employees' Retirement System Act, 2006 (OMERS Act, 2006). Specifically, section 9 of the OMERS Act, 2006 states that "[t]he primary pension plan must be a defined benefit plan."
Section 9 of the OMERS Act, 2006 unnecessarily restricts OMERS' sponsors from investigating, let alone implementing innovative plan designs that might otherwise be adopted to protect or further enhance the value, security or cost of OMERS benefits. Other plans, including other public sector plans, are not subject to this same restriction.
The joint sponsors of OMERS must be provided with the flexibility to determine the future design of OMERS plans, within the parameters of the PBA and the ITA. Specifically, section 9 of the OMERS Act, 2006 must be deleted.
The Report states (at Recommendation 4-21) that:
The government should proclaim in force the provisions of the Pension Benefits Act that allow it to require that pensions be inflation-adjusted in accordance with a formula to be prescribed. That formula should be restricted to "inflation emergencies".
No definition of "inflation emergencies" has been provided, and the Report fails to set out any parameters on what might be appropriate in terms of prescribed indexation benefits.
If proclaimed into force, as provided by Recommendation 4-21 of the Report, the PBA provisions respecting inflation protection would represent a potential funding risk to OMERS, as well as other plans. This is particularly concerning since a plan could be required to provide indexed benefits at a time when improvements to benefits are least affordable.
Presently, OMERS provides 100% inflation protection, capped at 6%, with a carry forward for the excess. We understand, however, that this is a very expensive benefit and, in view of the significant associated cost, submits that it is critical that the sponsors of OMERS have the ability in the future to make prospective changes to indexation provisions if and when the joint sponsors deem this to be necessary - to maintain the security of benefits and/or their affordability for both members and employers. Sponsors are in the best position to determine this.
The importance of retaining flexibility has been underscored by recent changes to inflation protection made by the Hospitals of Ontario Pension Plan (HOOPP)) and, more recently, the Ontario Teachers' Pension Plan (OTPP) - each of which moved to a form of ad hoc indexing (whereby benefits are to be fully indexed only if and when such indexation is affordable).
Without these changes, the sponsors of HOOPP) and the OTPP would have been required to reduce other benefits or pay much higher contributions into the plans as means to improve funding levels. In the case of the OTPP, the change to the indexation formula was introduced to facilitate a reduction of a $12.7 billion funding shortfall that was reported in 2008.
Recommendation 4-21 is strongly opposed. OMERS (and other plans) should be left free to change existing indexation provisions, and without the funding risk and uncertainty associated with providing Government the authority to impose a minimum level of indexation.
Recommendation 5-11 of the Report states that active plan members should be immediately vested for all accrued pension benefits.
At present, the OMERS primary and supplemental plans provide for immediate vesting. In comparison, most other Ontario public sector plans only provide vesting after 2 years of credited service or plan membership.
AMO is opposed to restrictions that would have the effect of limiting the existing authority of the OMERS' sponsors to determine appropriate vesting rules for the OMERS pension plans. It is important that the OMERS' sponsors retain existing decision making authority over plan design and benefits, including vesting provisions, as further restrictions have the potential to significantly hinder the ability of the OMERS' sponsors to maintain liabilities at levels that are reasonable and affordable for both members and employers.
The recommendation that active plan members be immediately vested for all accrued pension benefits is strongly opposed.
We thank the Ministry of Finance for this opportunity to comment on the Commission's Report and hope that our recommendations are considered and acted upon. Please kindly contact the undersigned at (416) 971-9856, ext. 316, with any questions or concerns.
Original signed by
Executive Director, AMO
Cc: The Honourable Jim Watson, Ministry of Municipal Affairs and Housing Deputy Minister Peter Wallace, Ministry of Finance Deputy Minister Fareed Amin, Ministry of Municipal Affairs and Housing