Multi-Employer Benefit Plan Council of Canada
About MEBCO
The Multi-Employer Benefit Plan Council of Canada (MEBCO) was established in 1992 to represent the interests of Canadian multi-employer pension and benefit plans (MEPs). MEBCO consults with provincial and federal governments regarding proposed or existing legislation and policies affecting these plans. MEBCO is a federal no-share capital corporation, operating on a not-for-profit basis.
MEBCO is representative of all persons and disciplines involved in MEPs, including trustees (union, independent, professional and employer), professional third-party administrators, non- profit or “in- house” plan administrators, and professionals including actuaries, benefit consultants, lawyers, investment managers, investment counsel and chartered public accountants. MEBCO is administered by a Board of Directors consisting of representatives from each of the above groups. The Board of Directors serve MEBCO on a volunteer basis, and are responsible for identifying issues that impact MEPs, developing a strategy to address those issues, and then carrying out the strategy. MEBCO’s member-plans provide comprehensive pension and health coverage to over 1,000,000 Canadians.
MEBCO Feedback
Thank you for the opportunity to provide feedback on the Consultation Paper “A New Framework for Multi-employer Negotiated Contribution Pension Plans” (CP). MEBCO is pleased to provide feedback on the CP on behalf of our member plans. One of the major philosophical views of MEBCO is that Multi-employer pension plans (MEPPs) do not fit well into the traditional single employer defined benefit (DB) pension plan regulatory model, and we support the proposal to create a framework specific to multi-employer negotiated contribution (NC) pension plans. In addition, MEBCO’s core position is that solvency funding should not apply to MEPPs and welcome the proposal made in the CP that would remove solvency funding requirements for NC plans.
We note that the CP has acknowledged some of the key differences between NC plans and other DB pension plans, including the risk assumption and contribution structure. However, we stress that a model with rules that are applied mathematically to all NC plans is not appropriate. The reality is that NC plans vary substantially from each other in important ways. What is reasonable for a large national plan may make no sense for a smaller local plan. We therefore do not support a highly rigid regulatory model for NC plans. The MEPP board of trustees, with the assistance of their advisors, have the knowledge and fiduciary responsibility to reflect their unique circumstances.
We address the specific questions from the CP in our comments below. Funding
Q 1) In the absence of solvency funding, should multi-employer NC plans be subject to a going concern buffer (i.e., PfAD) as part of an enhanced going concern funding standard? If yes, on what measure should the PfAD be calculated (e.g., ongoing concern liabilities, current service/normal costs)?
A 1) MEBCO’s position is that there should be reasonable going concern funding requirements for NC plans. If required at all, any regulated PfAD requirement should be set at a minimum level that is not unduly conservative and would still allow each individual plan to balance the various plan objectives, including benefit adequacy, affordability, security, stability and intergenerational equity. Minimum funding standards should recognize that different NC plans may be designed to meet different levels of benefit security/risk. Some may adopt minimum margins focusing on intergenerational equity with more frequent increases and decreases to benefit levels, while others may adopt larger PfAD provisions focusing on contribution/benefit stability. It is the board’s fiduciary responsibility to ensure that the PfAD, if any, is set to meet the needs of the plan and any applicable legislation.
We also note that the amount of any minimum level of PfAD should:
For example the PfAD should not reference bond rates since this would have the impact of replicating solvency funding rules that have already been found to be flawed for NC plans. There are many other factors that should be taken into consideration when determining the level of PfAD that meets the needs of the plan. These factors include plan maturity, demographics, employer diversity, investment policy, risk of future decline in covered employment, and benefit adequacy, and the actuarial cost method and assumptions. Therefore, MEBCO does not support a formulaic “one size fits all” rule that substitutes a universal formula for a plan-specific consideration of the risks and benefits.
Any minimum regulated PfAD should only apply to the normal cost of future benefits being earned. Although the objective may be for a plan to have a fully funded PfAD on the going concern liabilities, this PfAD should not be funded in the same manner as the pension plan’s other going concern obligations. The requirement to fund the PfAD on going concern liabilities would result in increased funding variability which is detrimental to NC plans. This is because NC plans have fixed contributions negotiated by the bargaining parties, not the board of trustees of the NC plan. Benefit security can perhaps be enhanced by higher employer contributions, but NC plans do not have that option. Higher funding requirements for NC plans due to funding of the PfAD simply results in lower benefits, and that cannot improve benefit security. It also shifts assets from one generation of members to another generation of members. Therefore, the PfAD should be built up in favorable times and drawn down in times of adverse plan experience.
Q 2) Are there other funding models that could be considered for multi-employer NC plans under the new proposed framework without solvency funding? For example, should a shorter time horizon for amortizing going concern deficits be considered as an alternative to enhanced going concern funding?
A 2) The CP notes the other provincial frameworks in place for plans similar to NC plans. Although these regimes have merits, some of the prescriptive requirements in these frameworks unduly skew plan design and funding in the direction of future benefit security, resulting in inadequate current benefits. For example, under the Alberta and BC rules the PfAD could be easily 25% or more. In addition, there is a requirement to amortize unfunded liabilities over the Expected Average Remaining Service Life (EARSL). A plan’s EARSL can be much lower than a typical amortization period of 15 years. This results in a further increase in an already overly conservative funding requirement. These overly conservative funding requirements ultimately lead to lower benefits than a plan can reasonably afford. In the likely case where those Pads are not needed, they get released in the form of higher benefits to a future generation – today’s active plan members and retirees would be forced to pay for benefits that go instead to future retirees – and the rigidity of the proposed funding model will compel those deferred higher benefits to be delayed until several generations later.
We believe that a framework with a minimum PfAD should require the going concern unfunded liability to be amortized over a reasonable period, such as 12 or 15 years. But in the event that there is a contribution shortfall, the PfAD funding requirement should be reduced to the greater of the existing PfAD and the required amortization amount.
Of the provincial frameworks currently in place, we believe that the current temporary requirements in Ontario applicable to Specified Ontario Multi-Employer Pension Plans (SOMEPPs) is an example of an acceptable alternative to enhanced going concern funding. This framework provides reasonable amortization periods for going concern deficits, in combination with no prescribed PfAD amounts. The main details of the amortization requirements include:
Q 3) In the absence of solvency funding, should the existing minimum threshold required for benefit improvements (solvency ratio of 0.85 after the amendment) be revised? What would be an appropriate threshold? For example, should the revised threshold be based on a going concern funding ratio?
A 3) Yes, we believe the existing threshold should be revised. MEBCO suggests that, in respect of any plan changes, decisions be based on the relationship between contribution income and actuarially calculated cost, not on funded ratios. For an ongoing NC plan, the funded ratio is an inadequate measure of plan health. A fully funded plan with contributions less than the normal cost is a plan in financial trouble. A plan that has an unfunded actuarial liability with contributions adequate to pay the normal cost, reasonable amortization of the unfunded actuarial liability, and plan expenses is a healthy plan.
Like the current model in place for SOMEPPs in Ontario, a shorter amortization period for the unfunded liability resulting from a benefit improvement would be reasonable. The contribution income must then be sufficient to cover the normal cost, the amortization of benefit improvements and the greater of (i) ongoing unfunded liability payments (determined excluding the PfAD on going concern liabilities) and (ii) the normal cost PfAD.
As was previously noted, overly conservative funding requirements ultimately lead to intergenerational inequities with today’s active plan members and retirees paying for benefits that go instead to future retirees. Members of multi-employer NC plans view their negotiated pension contribution rate as part of their overall compensation package. These members will resist giving up current cash compensation by agreeing to higher pension contributions when little or none of the added value goes to them. This presents a risk to the plan and threatens its future sustainability.
Funding Policy
Q 4) To encourage a strategic and transparent approach to funding, should multi- employer NC plans be required to establish and maintain a funding policy with the prescribed elements? In addition to what is considered above, are there any other elements that should be considered for multi-employer NC plan funding policies?
A 4) MEBCO agrees that establishing and maintaining a funding policy is an appropriate requirement for multi-employer NC plans. The policy should be developed based on the principles set forth in the CAPSA Funding Policy guideline.
The funding policy should serve as a guide for the board of trustees by setting out factors to consider when doing such things as setting the actuarial basis, determining how and when benefit adjustments may be considered and implemented and addressing aspects of filing actuarial valuation reports. In determining the elements of a funding policy required for multi- employer NC plans with respect to benefit adjustments, it is important to take into consideration that the circumstances that lead to specific decisions having to be made can vary significantly from case to case. Therefore, the elements contained in the funding policy should act as guidelines or general principles for the fiduciary board of trustees to follow, rather than being overly formulaic or restrictive and dictate the decisions themselves.
Portability
Q 5) What are your views on the current methodology used to calculate the individual termination value for multi-employer NC plans?
A 5) MEBCO does not agree with the current methodology used to calculate the individual termination value for multi-employer NC plans as it does not recognize the risk of a post-transfer benefit reduction.
The current method rewards those who terminate from a NC plan and leaves the losses created by the commuted value for the remaining active and retired members to pay.
MEBCO strongly recommends that multi-employer NC plans be permitted to determine the lump sum amount on a going concern basis and adjusted for the plan’s funded status (but not in excess of 100%). This approach is consistent with the methodology for calculating commuted values applicable to Target Pension Arrangements (TPAs) recently adopted by the Canadian Institute of Actuaries (by an amendment to Section 3500 of the Practice-Specific Standards for Pension Plans– Pension Commuted Values released on January 24, 2020 and effective August 1, 2020 {the CIA Standard}). This methodology should be applied for multi-employer NC plans and we believe that it would be automatically required by the PBSR.
Q 6) What would be an appropriate approach to the calculation of commuted values in the absence of solvency funding requirements? For example, should plans be free to choose between different methodologies prescribed in regulation?
A 6) As noted above, MEBCO believes the calculation of commuted values (CVs) for multi- employer NC plans in the absence of solvency funding requirements should be based on the plan’s going concern funding assumptions, excluding any explicit PfAD required by law. This is the basis required by the new subsection 3570 of the CIA Standard applicable to TPAs. Subsection 3570 of the CIA Standard also allows for the CV to be adjusted to reflect the funded status of the pension plan if required by legislation or by the terms of the plan. MEBCO believes that this should not be legislated, and the board of trustees should be able to apply the plan’s going concern funded ratio to the CV as they feel appropriate for the circumstances of their plan.
Although the CIA Standard is effective August 1, 2020, early adoption is permitted for TPAs that fall under the new subsection 3570. Therefore, if a new regulatory framework for NC plans is enacted prior to August 1, 2020, the regulation should permit early adoption of the CIA Standard. We note that such methodology is currently permitted in the BC, Alberta and Saskatchewan jurisdictions for such plans.
Governance Policy
Q 7) Would it be appropriate to require multi-employer NC plans to establish a governance policy with the minimum prescribed content? If yes, should the prescribe content align with the CAPSA Governance Guideline?
A 7) MEBCO believes that governance policies are desirable for all plans, and that content as suggested by the current CAPSA guidelines is sufficient. However, we believe that any regulatory requirement should set out the basic content and principles for a governance policy and should not be overly prescriptive.
Disclosure
Q 8) To encourage more robust disclosure to plan members and retirees, should plan administrators be required to continue to report the solvency ratio of the plan and related information in its annual statements?
A 8) MEBCO understands and supports the need to ensure full and complete disclosure to plan members, but do not think reporting the solvency ratio should be required. Given that solvency funding will not apply to multi-employer NC plans and that CVs will be calculated on a going concern basis under the CIA’s amended section 3500, the solvency ratio is not an appropriate measure of the funded position for these plans. Depending on how the solvency ratio is communicated to members, it can be misinterpreted and may cause unnecessary concern.
Therefore, if there will continue to be a requirement to report the solvency ratio of the plan in the annual pension statements, legislation should strongly encourage the appropriate accompanying disclosure. Plans should explain the limited applicability of the solvency ratio and should also be able to explain that, if the plan is ongoing, the solvency ratio does not impact the value of their benefits.
Q 9) Are there any other circumstances where new disclosures could be needed for NC plans, in addition to what is currently set out under the PBSA?
A 9) The current requirements include disclosure regarding the possible reduction of benefits if funding is not sufficient to meet solvency standards. We expect that this requirement will be revised accordingly with the revision to solvency funding requirements for multi-employer NC plans. We believe this is important information for plan members and plans should be encouraged to provide additional disclosure of the nature of the benefits in these plans. That is, a description of the relationship between the contribution and funding requirements and the non- guaranteed nature of the benefits. It is very important that members understand that benefits can be reduced or increased depending on the plan’s funding. The remaining current regulatory requirements for multi-employer NC plans are sufficient and do not require further expansion.
Thank you for the opportunity to express our views in this submission.
Robert Blakely
President
robertblakley@mebco.org
The expert voice of multi-employer benefit interests in Canada.
Join Today!