February 26, 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
Dear Mr. Duncan,
INCREASING AFFORDABILITY, SUSTAINABILITY AND SECURITY OF DEFINED BENEFIT PENSIONS
We would like to thank the government of Ontario for establishing a Commission to review Ontario's pension system. Pension plans are a critical part of the benefits we, the Seventh-day Adventist Church (the "Church"), offer to our employees. Many of our employees choose to work with us for more than just financial reasons, and they expect that the Church will look after them in their retirement years. It is therefore absolutely crucial that we continue to be able to offer a defined benefit pension plan. While the Ontario Expert Commission on Pensions Report ("OECP Report") had some good ideas, on balance, we think that the consequences of the recommendations for single-employer pension plans will be dire. We are concerned that if the recommendations are implemented as-is, we may no longer be able to sustain our pension plan.
The history of the Seventh-day Adventist Church in Canada dates back to 1880 when it was first established in Quebec. Twenty-one years later, in 1901, the National Church was formally organized. Then in 1936, the National Headquarters in Canada, relocated to Oshawa, Ontario, where it remains today. We believe that the nature and purpose of our organization makes it less likely to become insolvent or go "out of business" as compared to private sector, for-profit employers.
Based on the most recent valuation of our plan as of January 1, 2008, the going concern funded status was at 100%. Accordingly, the objective of increasing benefit security over time has been achieved. Unfortunately, the solvency funded status was only 77%. This is not because of poor funding, as evidenced by the strong going concern position of the plan, but what we feel are unrealistic and far too stringent solvency (and related) funding requirements. We would also like to mention that since the plan was established, we have been able to provide pension increases of at least 1% in most years. We get regular comments from our members expressing their gratitude for providing these increases. To them, the fact that we are able to provide such increases on a regular basis, along with the long term viability of the Church, says more about the security of their benefits than what the current and proposed solvency funding requirements would say.
For the Church, stability of costs is very important. Unfortunately, we have not been able to achieve this stability when it comes to our pension funding requirements over the last several years. Many of the recommendations in the OECP Report would exacerbate this problem.
In particular, the issues we wish to raise in this letter are:
Solvency Funding Requirements
The current solvency funding rules are premised on a "worst case" scenario in which the plan sponsor becomes insolvent and the plan is terminated. These rules are applied uniformly to every sponsor regardless of the level of an individual organization’s insolvency risk. As noted earlier, the Church is unique among private sector employers, most of which are more closely tied to economic and business cycles. Because of this, we feel that greater regard should be given to the individual plan sponsor's circumstances.
While the OECP Report makes positive recommendations with respect to solvency funding, these recommendations are focused on multi-employer plans. We feel that very little was done to address the needs of single-employer plans. In fact, if the OECP Report recommendations for single-employer plans are implemented, this would represent a step backwards from the current rules, e.g., removal of solvency smoothing.
While we feel that based on the nature of our organization, which is truly a going concern entity, we should not be subject to solvency funding, we also recognize that it may not be possible to eliminate the concept of solvency funding entirely. Our hope would be that if solvency funding rules are to apply to organizations such as ours, (i) we would at least be able to spread the amortization payments over a period of 10 years, (ii) the current rules allowing smoothing of assets and liabilities would be maintained, and (iii) the requirement to fund to a 5% margin as recommended by the OECP Report would not apply. Alternatively, we believe that a funding regime that requires contributions on a going-concern basis combined with a lien on the employer's assets in respect of any solvency deficiency would provide good protection for benefit security at a reasonable cost for the employer.
We have concerns with current grow-in benefits and the requirement to fund such benefits on a solvency basis. If the OECP Report recommendation to provide grow-in on involuntary termination is implemented, our solvency funding obligations will increase substantially and unmanageably.
We would like to emphasize that the Church is a national organization with members in all the provinces across Canada. The fact that we must fund for grow-in with respect to our Ontario members only creates an added cost for Ontario-based Church employment entities. The line between what is considered voluntary vs. involuntary termination can be blurry. If we will in the future be required to pay out grow-in benefits for terminations deemed "involuntary", as suggested by the OECP Report, this will take us further down a path to even greater unfairness and inconsistency of benefits. Equal treatment of The members, no matter where they work, is a cornerstone principle of the Church's approach to compensation. The requirement to provide grow-in benefits makes us unable to maintain equity among our plan members.
Grow-in benefits increase funding obligations and make contributions less predictable. They also result in inconsistent treatment of plan members on termination of employment and inconsistency of benefits between Ontario members and non-Ontario members. For these reasons, we strongly recommend that grow-in benefits be entirely eliminated.
Pension Benefit Guarantee Fund (PBGF)
The Church is strongly opposed to the OECP Report recommendation that the monthly coverage level be increased from $1,000 to $2,500.
We are concerned that a large claim against the PBGF would likely jeopardize the sustainability of the PBGF and require substantial increases in premiums paid by employers, or require subsidization by the Ontario government. We understand that the PBGF may now be at risk due to potentially large claims, and we understand that experience with pension guarantee funds in other countries has not been positive. Since the Church plan was established, we have remitted $710,000 to the PBGF. Based on our plan's fund rate of return, this amounts to $1,035,000 as of January 1, 2008. These payments to the PBGF would have served members better if they had been paid into the plan. Our plan members, for whom the pension plan is ultimately meant for, would be better off knowing their benefits are more secure.
We recommend that the PBGF be wound up, and we believe that the PBGF has no place in a voluntary pension system. We are concerned that the PBGF will result in some employers' contributions effectively paying for pension benefits of other employers' plans. An increase in the PBGF coverage level, as recommended by the OECP Report, would increase the risk that these kinds of subsidies will occur.
We hope our comments in this letter will have provided food for thought and practical alternatives to some of the OECP Report recommendations. We have given serious consideration to the necessary and significant overhauls that are required to the Ontario pension system. While we are not a large employer, we are national in scope and non-profit, and have voluntarily elected to offer a pension plan.
In closing, we appreciate the efforts that the Commission has made to examine Ontario's pension system. A vibrant dialogue has been created. However, we are concerned that unless our voice is heard, the consequences for us, our members, and the public at large could be negative.
We thank you for taking the time to listen.
Originally signed by
Daniel R. Jack, President
cc: Jerry Ouellette, MPP