February 27, 2009
On behalf of the approximately 15,000 professors and academic librarians in Ontario's universities, the Ontario Confederation of University Faculty Associations (OCUFA) is pleased to submit to the government its response to the report of the Ontario Expert Commission on Pensions. We applauded the government's decision to establish this commission back in 2006, and would add to that now our sincere appreciation to Commissioner Arthurs and his staff and colleagues for the care, thoughtfulness and thoroughness with which they approached this important review.
Clearly, this report could not be more timely; we are witnessing a degree of uncertainty and volatility in financial markets that many pension plan members and even sponsors have not experienced in the past. While this period may shed additional light on the strengths and weaknesses of the current regime, it is crucial that we not let this short term volatility divert our attention from the long term horizon which guided the recommendations of the commission. In particular, we ask that the government give careful consideration to the input of the stakeholders regarding solvency funding before drafting any legislation to grant temporary relief to pension plans.
The extensive and exhaustive research program undertaken by the commission was of great value to the pension community in and of itself, serving to update and quantify our understanding of the breadth and reach of pension plan coverage today. Of particular note was the research indicating that the bulk of the decline in defined benefit plan coverage can be traced to labour market changes, particularly diminished union density and decreasing employment in sectors where defined benefit pensions were most common.
These findings suggest that the government may need to review the Labour Relations Act as well of the Pension Benefits Act in order to maintain and encourage the system of defined benefit plans in Ontario. More important, this research supports our position, stated in our initial brief to the commission, that the original mandate of this review could not then, and cannot now, be expected to extend the reach of defined benefit pensions. The package of recommendations put forward by the commission will do little, if anything, to stop the decline in DB plan coverage in this province caused by externalities well beyond the reach of the Pension Benefits Act (PBA).
In light of this, we encourage the government to follow up on the excellent work done by the commission with the necessary research and policy development to ensure income security in retirement for all Ontarians – those in small workplaces, homemakers, the self-employed, the long-term unemployed, and all the others left out by the mandate of this review. In particular, we ask that the government accept the recommendation of the commission that it investigate the possibility of an expanded mandate for the Canada Pension Plan or a comparable provincial plan, and that you support a national summit on pensions at the earliest possible opportunity (Recommendations 9-4 and 9-5).
In our original comments to the commission, OCUFA drew a very clear link between how a pension plan is governed and the appropriate model of funding and valuation that flows from that governance model. We encouraged the commission to consider a number of measures to strengthen pension plan governance, and give our members more say and control over how their pension monies were managed.
As a result, we are pleased that Commissioner Arthurs accepted as an underlying principle of his recommendations that voice and participation in pension plan governance by members be encouraged, and further, that active participation by members and retirees in the governance of the plan might be the basis for differentiation in funding rules.
We accept and acknowledge the recommendation that multi-employer pension plans (MEPPs), jointly sponsored pension plans (JSPPs) and single-employer pension plans (SEPPs) be subject to different funding rules, premised largely on the concept that the risk profile of a pension plan is profoundly affected by whether a pension promise is a fixed rather than a contingent or a target benefit; how the plan is governed; and whether members are effectively represented by a collective bargaining agent, among other variables (Recommendation 4-8).
However, it is important to recognize that while many of these risk measures are associated with one or another of the three types of plans, the typology is not perfect. The report notes that the greatest risk faced by SEPPs is that the sponsoring employer will wind up insolvent. While this may indeed be the greatest risk facing private and for-profit pension plan sponsors, it is most emphatically not the case that university SEPP sponsors (which represents 100 percent of the plans in this sector) are at any great risk of insolvency.
The commission argues in its report that public sector and broader public sector plans should not be subject to different rules than the private sector SEPPs simply on the grounds that they are in the public sector; we agree that this is not a principle on which funding differentiation ought to based. We believe that funding rules should be based on risk-based principles, particularly the credit worthiness of the plan sponsor (a discussion we will return to in the regulation section of this paper), and the governance structure of the plan.
We appreciate the difficulty the commission faced in attempting to deal with one of the thorniest of funding issues: access to the surplus generated in a pension plan (on wind-up or in an on-going plan), and the related issue of contribution holidays when the plan is in a surplus state. Although we have written extensively on this issue to governments in the past, we will comment only briefly on the recommendations contained in this report related to the disposition of surplus in pension plans.
Recommendation 4-17 speaks to the entitlement of a plan sponsor to reduce or omit their contributions to a plan (subject to the security margin). This is a problematic premise for our members. Aside from our many principled and theory-based objections to this recommendation, our opposition is based on the fact that our members contribute almost half the money required to finance our pension plans. We can see absolutely no basis for allowing a unilateral contribution holiday for one of the two funders of the plan.As we outlined in our initial brief to the commission, there is a long history of sharing shortfalls in funding in this sector. In light of that, there is no rationale for unilateral withdrawal of pension surplus exclusively by the employer through one-sided contribution holidays. Contribution holidays by some of the universities in the 1980s and 1990s left the workers carrying the burden of the current service cost of the plan on their own, leaving the universities pension plan sponsors in name only.
Additionally, allowing contributions holidays above the level of 105 percent of solvency liabilities provides little or no margin for error. We have seen plans go from fully funded to requiring special payments with breathtaking speed. The commission seems to recognize this in recommendation 4-24, where it recommends that the Income Tax Act (ITA) be amended to increase contribution limits above the current limit of 110% of liabilities.
OCUFA supports the recommendation that the Ontario government initiate discussions with the federal government on creating an additional buffer of security under the ITA. Hopefully this will lead to more benefit security for workers, and less emphasis on the part of plan sponsors on removing "surplus" cash from the plan.
With respect to the commission's view that parties to a collective agreement ought to be allowed to negotiate other arrangements for the use of surplus in an ongoing plan, we would merely say that this has proven to be impossible without extensive litigation any time the pension plan documents give employers any reason to believe their viewpoint might prevail in court.
It is not clear why there should be a distinction made between withdrawal of surplus through a contribution holiday and withdrawal of surplus from an on-going plan through a surplus distribution agreement with plan members and their bargaining agents.We believe that contribution holidays should be treated the same as any other surplus withdrawal, requiring plan member approval and agreement.
All our comments regarding the use of surplus and contribution holidays would also apply equally to recommendations 5-21 and 5-22 regarding the use of surplus in the conversion of a defined benefit pension plan to a defined contribution plan.
The commission recommends a five-year pilot project on the use of irrevocable letters of credit in lieu of pension plan contributions for plan sponsors. Although we indicated in our initial brief that letters of credit or asset pledges might form part of a package of amendments addressing solvency funding issues, the recommendation in the report is unclear on the circumstances under which their use might be appropriate. More information and development of these concepts will be required before we will be in a position to comment.
Pension plans in a changing economy
Improving and expanding pension plan coverage of academic staff is a key priority of OCUFA. In particular, covering the growing legions of faculty teaching on a per course basis in Ontario universities will require amendments to the PBA to remove the many obstacles that remain in the way of achieving this goal.
Clearly, the creation of the Ontario Pension Agency (OPA), as recommended by the commission, is a very important step in assisting part-time workers in possibly achieving an earnings based pension upon retirement. Creating a vehicle in which individuals can deposit credits from multiple employers, as well as possibly augmenting those with individual contributions, will be a marked improvement over the status quo.
Whether individuals will find this option attractive will depend in large part on the capacity of the OPA to provide better value for the pension funds deposited with them than the other options available to that person. For this to be the case, the OPA will need to build a large capital base, provide flexibility in both contributions and pension options, and most important, be operated on a basis that keeps fees and expenses as low as possible. Those stakeholders that represent transient and contract workers will have many ideas to offer the government in its creation of the OPA, and we encourage you to consult the Pension Community Advisory Council when implementing this recommendation.
As well, we support the commission's recommendation that active plan members become immediately vested for all accrued pension benefits. For those contract workers fortunate enough to clear the bars to entry which exist in university pension plans, this recommendation will ensure that they do, in fact, have pension assets to transfer to the OPA when they are no longer employed at a particular institution.
Neither of these recommendations, however, will help the many contract faculty members who cannot participate in the pension plan at all because they do not meet the eligibility requirements of a particular plan, either because they do not have sufficient continuous service to qualify, or they do not have sufficient hours or earnings, or both. As well, although almost all of our plans are mandatory for tenure stream faculty, they are generally elective for part-time and contract faculty.
The mandate of the commission directed it to develop recommendations to deal with the changing nature of the workforce in the provision of employment pensions. Both the original discussion paper and the Fine Balance report acknowledged the growing trend toward part-time and transient employment as one of the key labour market trends that undermine the coverage of defined benefit pensions in Ontario. In light of this, it is both puzzling and disappointing that the commission did not choose to follow the lead of other Canadian jurisdictions, such as Manitoba and Quebec, with mandatory pension membership where a pension plan exists in the workplace, and a lower bar for participation by part-time employees than currently exists under the PBA.
The paucity of reciprocal transfer arrangements among Ontario universities is not just an obstacle to achieving an earnings-based pension for part-time and contract staff, it is an impediment to mobility and a full, career-based pension for tenure stream faculty and permanent university staff as well. The commission notes in its report that the pension system in Ontario is voluntary and, therefore, it is difficult to impose on employers the obligation to accept pension credits from a newly hired employee. This position may have some merit in the private sector, when dealing with disparate corporate entities unrelated to one another. However, we believe more can be done in the university sector, where the movement of faculty is occurring between a very small number of institutions with similar missions and structures. Universities are almost unique among large institutions in the public or broader public sector in not having full portability within the sector.
Perhaps the recommendation that sponsors be required to develop a standard policy on pension credit transfer may begin to change the culture to one of greater pension portability. In the absence of any rules or principles to create a fair and equal system of credit valuation, it appears that it is now in the hands of the Pension Champion to use its powers of suasion to assist mobile employees in achieving career based pensions in retirement.
OCUFA supports the commission's recommendation that the PBA be amended to facilitate phased retirement, as contemplated under the ITA. Many of our member associations have begun to negotiate phased retirement options for academic staff, following the elimination of mandatory retirement in Ontario. This amendment will open up new avenues for negotiation and create additional choice for workers wishing to transition to retirement over time. It is important, however, that phased retirement amendments not open the door to selective retirement offers to individuals but, rather, are used exclusively to create opportunities for broad classes of plan members meeting the necessary criteria.
We welcome the return of a specialized pension regulator and tribunal with expertise in pension issues. There is clear recognition in the recommendations, both on this issue and many others, that pensions are essentially an employment benefit, arising from an explicit or implicit employment contract.As such, there can be an adversarial and bipartisan relationship between the parties to a pension dispute, requiring that disputes be resolved by either a balanced panel, or a neutral third party.
OCUFA had recommended to the commission that a bipartisan body, modeled on the Labour Relations Board, be struck to deal exclusively with pension issues.The commission chose to recommend a model where the chair of the Pension Tribunal of Ontario (PTO) is an individual perceived by the parties to be neutral, supported by members with professional expertise in pension matters, and chosen by a bipartisan committee. Although agnostic on the particular mix of expertise that might most benefit the PTO, we support the efforts of the commission to ensure neutrality and impartiality in this body and to recognize the importance of avoiding a conflict of interest with part-time members' other employment.
OCUFA supports the recommendations of the commission aimed at creating a pension community with the resources to undertake continuing research and facilitate dialogue among the stakeholders themselves, with the pension regulatory structure, and with the government of Ontario. In particular, we support the creation of both the Pension Community Advisory Council, as well as the Pension Champion. We encourage the government to establish these entities expeditiously, so they may play a meaningful role as the province amends the PBA and develops new regulations.
The role of professional standards in pension regulation
OCUFA supports the position of the commission (Recommendation 7-4) that government must accept ultimate responsibility for setting the standards that govern the conduct of professionals in the pension system and, further, that once established, professional standards are adopted by reference in the regulations to the PBA.
OCUFA, as well as many other stakeholders, expressed concern in our communications with the commission that the existing system of actuarial valuations lack transparency, are subject to wide discretion, and are susceptible to becoming captive to the financial interests of the plan sponsor in pensions plans that are not jointly governed (such as those in the university sector). The commission chose to reject the model of those countries that had more closely regulated the discretion of actuaries, in favour of giving the Canadian Institute of Actuaries (CIA) another opportunity to develop more appropriate professional standards.
It is our hope that greater involvement by the pension regulator, as well as oversight by the Pension Community Advisory Council, will indeed result in the voluntary acceptance by the CIA of standards that meet the needs of both plan sponsors and plan members. The likelihood of this will be enhanced by the development of criteria and benchmarks for success and the establishment of deadlines for completion as very early tasks for the council.
Should the voluntary process not produce satisfactory results in a timely manner, the government must ensure that formal regulations are adopted under the PBA, as recommended by the commission.
Following this line of reasoning, OCUFA also supports the recommendation that the superintendent have the power to require plans to stop using assumptions that depart from professional standards and raise the bar of oversight on those plans that misrepresent a material factor in its funding (Recommendation 4-2).
The commission's report argues that the pension regulator should facilitate the introduction of a program of enhanced, risk-based regulation, and should augment its current use of two risk-based systems, the Actuarial Information Summary and Investment Information Summary, with two additional risk indicators currently in use in the UK: the credit-worthiness of plan sponsors and the plan size. The commission also recommends that the regulator expand its systems for monitoring risk and be empowered to undertake remedial measures based on the results of its proactive monitoring.
OCUFA supports greater emphasis on and sophistication in the use of a risk-based approach to pension regulation. We argued in our original submission for a greatly expanded role for going-concern valuations in order to expose the full range of risks facing plan sponsors, including economic or business risks. Further, we argued that the regulatory approach to protecting plan members form insolvency should also be risk-based.
The commission considered, but then rejected, the concept that public and broader public sector plans should be exempt from solvency funding on the grounds that they were unlikely to be wound up and, further, that in the unlikely event of a wind-up would have sufficient resources to meet their obligations. Yet, surely, this is a measure of the credit-worthiness of public and broader public sector plan sponsors, a risk measure supported and recommended by the commission.
We believe the role of the regulator should be expanded to enable it to use the results of its proactive, risk-based assessment systems to assess the full range of resources available to the sponsor and approve different models of insolvency protection and mitigation based on the likelihood of default.
OCUFA does support the recommendations of the commission to strengthen the Pension Benefits Guarantee Fund (PBGF), particularly the recommendation to increase the monthly payout to cover the inflation that has occurred since it was established. For many plan members, the PBGF is the only viable way to mitigate the risk of employer insolvency.
OCUFA shares the commission's view that transparent and participatory governance of our pension plans is fundamental to ensuring that all other aspects of the pension regime are right. We were most impressed with the seriousness with which the commission turned its attention to the development of benchmarks for pension plan success; to the issue of transparency in investment policy and governance models; to the need to prepare plain language information for plan members; and to the rights of participation of employees and retirees in decision-making.
We concur that the presence and active involvement of a union, both on behalf of its active members and retirees, should be encouraged by the regulatory regime, and the union, furthermore, can substitute for more stringent oversight by the regulator on some aspects of governance.
Key to good governance is a concept the commission refers to as "honesty". In the context of pension plan administration, honesty refers to the obligation of the administrator to serve the interest of the plan and its members with "undivided loyalty". As we made clear in our brief, and as the commission acknowledges in its report, a system in which the employer acts as both plan sponsor and plan administrator cannot but undermine the governance of the plan.
While recognizing this inherent conflict of interest, the commission rejects the possibility of requiring that pension plan administration occur at arm's length from the sponsor's business, on the grounds that making this a legal requirement might destabilize the SEPP system. While we recommended a less voluntary and more regulatory requirement for the separation of sponsorship and administration, we are heartened by the commission's call that the Pension Champion work with the stakeholders to find resolutions to these conflicts.
We would make similar comments on the voluntary approach the commission recommends to the determination of who is a fiduciary in the pension system. We hope that the government, should these efforts not result in governance improvements in a timely manner, will re-visit the question of whether more specific regulation might be required.
We support Recommendation 8-18 that best-practice guidelines be developed by the regulator to give meaning to the key governance concepts outlined in the recommendation. Further, we support the full package of recommendations regarding the availability of pension plan documentation; individual pension entitlements; and governance, funding and investment policies. In an era of readily available electronic information, none of these requirements seem particularly onerous on plan sponsors.
We are supportive of the establishment of mandatory advisory committees. In our initial submission we encouraged the commission to consider whether it would be appropriate to allow such committees the right to vote to become the plan administrator if a majority of the members were in favour. We support the view of the commission that retired members continue to have a role and and interest in the governance of the plan and should be provided with a role in the mandatory advisory committee.
In summary, we wish to underline and support a point made by the commission very early in the final report: if the recommendations made by the commission are to have any chance of success, they must be accompanied by sufficient resources to ensure their implementation is possible. The government must invest money in the regulatory machinery and provide public support to the new institutions and services that will result from the implementation of this report.
We look forward to providing further input on these important issues as the government develops its legislative response to A Fine Balance, and we encourage the government to make good on the commission's recommendation that an advisory council be struck early in the process to assist in fleshing out the many important proposals contained in this review.