Multi-Employer Benefit Plan Council of Canada
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A Permanent Framework for Target Benefits: Second Follow-Up Consultation Response by MEBCO

MEBCO understands the government’s objectives related to a permanent framework for target benefits and we thank you for hearing our concerns and making necessary changes to several of the requirements under the initial proposal, including the provision for adverse deviation (PfAD).

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. 

As we discussed at our September meeting we are formalizing our remaining concerns for further discussion and hoped for progress with further amendments to the Ministry of Finance (MoF) proposal for the permanent framework for target benefits.

In summary our key concerns for resolution are: 

  1. Contribution sufficiency test 
  2. Use of surplus 
  3. Prescription in implementing benefit improvements and restorations
  4. Prescription in the content and filing requirements for funding and benefits, governance and communication policies and the timeframe to prepare them 
  5. Prescriptive communications to new members, annual statements and notifications to contributing employers. 

FUNDING

Contribution Sufficiency

We suggest, in respect of the contribution sufficiency test, the test would only include the greater of the PfAD on the normal cost or the going concern special payments not due to benefit improvements. This approach will help meet the proposal’s objective of long-term sustainability while reducing the risk of benefit reductions. Requiring the funding of both a PfAD and special payments will result in benefit reductions during temporary periods of market underperformance simply due to the imposition of the PfAD.

In addition to the above, MoF is proposing that if a plan experiences a gain and previously scheduled special payments are not needed to satisfy funding requirements, the gain can only be used to reduce the term and not the amount of the payment schedule. Reducing the amount would provide plans more flexibility and if the term was acceptable when the payment schedule was established MEBCO suggests this remain the same.

MoF proposes giving a plan that does not meet the contribution sufficiency test only 90 days to implement changes to allow the plan to meet the test. This is too short to implement changes focused on long term sustainability and will result in some poor outcomes. MoF should allow not less than 180 days to give fiduciaries adequate time to consider a prudent course of action.

Use of Surplus

The proposed rules do not take into account that many target benefit plans work under many collective agreements and some may also have a small portion of the contributions not being made pursuant to collective agreements. Different collective agreements will expire and be renegotiated at various times over the course of an actuarial valuation cycle. The proposal to prohibit the use of surplus in the first valuation report after a new collective agreement and in circumstances where some contributions may be set pursuant to participation agreementswould result in a situation where some plans would never be able to use surplus. MEBCO suggests that these proposed restrictions be removed.

There are currently well-run target benefit plans that use Liability Driven Investing (LDI) to greatly reduce the funding volatility and overall risk of their plans. These funding strategies do not manage just the accrued liability but also the plan's future liability (or the future normal cost) with respect to interest rate risk. These strategies may set the duration of the assets to be greater than the duration of the accrued liabilities. This is done intentionally, to manage interest rate risk for not just the liabilities but also the normal cost of benefits. If long-term bond yields (interest rates) go down the assets backing the liabilities will grow faster than the going concern accrued 

liabilities thus creating additional accrued plan surplus. At the same time, normal costs for future benefits increase due to the interest rate drop. The surplus created on the accrued liabilities is then used to help pay off any contribution shortfall because of the rising normal cost and fixed contributions.

There should be no restriction on the use of surplus to pay for future benefits if the plan’s funded ratio is above 100% (including the use of the accrued liability PfAD). Restricting the use of surplus for target benefit plans that use an LDI investment strategy will force these plans to abandon the use of that strategy and substantially increase the risk of not paying the target benefits.

Adjustments to the use of surplus to fund current benefits will take many years for adaptation. If this is to be a continued rule, then MoF should allow ten years for implementation.

Commuted Values

MoF proposes that the adoption of the standards for calculating commuted values for target benefits using the methodology outlined by the Canadian Institute of Actuaries would only be used for members with a termination date or family law valuation dates on or after the effective date of the proposed regulations. These new rules should apply to all termination and family law valuation applications received on or after the effective date of the regulations, regardless of the termination or family law valuation date. In some cases, termination or family law valuation dates can pre-date when the application is received. This is especially the case for family law values where it is not uncommon to receive an application several years after the actual separation. This approach results in the use of a consistent basis for benefits calculated, and ultimately paid, after the effective date of the proposed regulations. In addition, it eliminates the  unnecessary administrative complexity of maintaining multiple bases.

GOVERNANCE

MEBCO supports all efforts for the good governance of all Canadian pension plans. We believe in appropriate standards that can be applied across all pension sectors whether the distinction is the province of registration or the type of pension plan – defined benefit, defined contribution, target, single employer or jointly sponsored pension plan.

A common theme across many of the MoF proposals is differentiation for the multi-employer target benefit plan sector that are not grounded in actual experience with the governance of these plans. In this regard we suggest MoF consider the following amendments to its proposals: 

  1. With regard to the prescriptive requirement for restoration of previously reduced benefits for any class of member we recommend this proposal be dropped. 

    Instead we recommend MoF recall that target benefit plans are covered by fiduciary boards of trustees who must abide by fiduciary duties that include the duty of care and the duty of loyalty to plan members and beneficiaries. Fiduciary responsibility requires that trustees be even-handed and equitable. The MoF proposals are too restrictive in requiring that previously reduced benefits be reinstated. Fiduciaries make benefit reductions and improvements with due care and therefore should not be required to reinstate earlier-made reductions. Similarly, the “equitable reductions” or "equitable improvements” rules should also be dropped. Limiting the percentage change in liabilities for members relative to former members when making benefit adjustments does not allow Trustees to account for all relevant considerations when making these decisions. For example, if the future service benefit formula is reduced and accrued benefits are not, this limitation does not allow Trustees to later re-instate benefits accrued at the lower future service formula. Contrary to what MoF is intending, implementing these limitations will result in inequitable treatment of these different classes of members.

    In some cases, all MEPP plan members vote to change benefits. MoF should respect the process fiduciary boards and members use to determine benefits and accept they are made with full view of the risks facing the applicable plan including funding risk, benefit risk, investment risk, operations risk and industry risk.

     

  2. In general MoF should try to align with other jurisdictions that have reasonable guidelines or legislation in place now respecting governance elements. There is emerging duplication with CASPA and other provincial regulators. It is noted that CAPSA Guideline #4 is mentioned in the MoF proposal – many Ontario MEPPs actively follow the principles in CAPSA Guideline #4.
  3. MEBCO agrees with MEPPs having a funding and benefits policy – we suggested expanding the policy to include “benefits” as they are linked to funding in MEPPS. The proposed content framework of a funding and benefits policy is appropriate but needs to be scalable to the applicable plan’s resources.

    In respect of the funding and benefits policy the MoF needs to define what a benefit reduction means. For example FSRA has the view that a prospective change in a benefit formula (for example changing future service accruals from 1.0% of contributions to 0.90% of contributions (again prospectively) is a benefit reduction – MoF did not hold this view. We suggest MEPP fiduciary boards agree with MoF that a prospective change in a benefit is not a benefit reduction. This is a material issue. Item 10 on page 8 of the MoF document leaves doubt as to how this proposal would be applied since it says “whether, and if so how, previously reduced benefits would be restored before additional improvements are made”. Again MEBCO disagrees with prescription to fiduciary boards that earlier reduced benefits be reinstated before any benefit improvements can take place. We strongly urge all proposals around this issue be dropped.
  4. MoF should allow three years from the date of proclamation to have plans prepare the required documents – this will allow plans to prepare appropriately – one year (page 23) is not sufficient. For example fiduciary boards will require time to consider appropriate elements of the policy or amendments to existing policies and may wish to do additional work such as carrying out asset liability studies. Otherwise we believe policies will not be as robust as MoF envisions and will not be effective for the MEPP. 
  5. The governance policy envisioned by MoF should allow reference to existing policies instead of duplication in plan documents.
  6. Item 4 in the proposal’s governance policy parameters say the policy is to include “the measures in place to provide the persons involved in the administration of the pension plan or pension fund with the ongoing training necessary to meet their obligations”. MEPPs regularly use external professionals and other delegates to carry out some of the necessary work to manage a MEPP. This is true of most pension plans, not just MEPPs. The proposal language does not reflect that the outsourced parties would be responsible for their training and education – not the MEPP. Again, CAPSA Guideline 4 references the needed knowledge and skills and this embraces delegates and oversight of delegates.

    Item 6 in the governance policy with regard to stress testing etc is a duplication of the funding and benefits policy requirements.
  7. MEBCO agrees with a three-year period for review of the funding and benefits and governance policies unless an earlier review is needed. It is noted many plans already have these policies and they provide for a regular review. Our concern again is the MoF proposal is too prescriptive and laying down rules that are particular to MEPPs and not other sectors. A better approach would be to say “regular review”. 
  8. MEBCO disagrees with the proposal that MEPPS provide evidence of review of governance and funding and benefits policies. MEPPs have been in existence since the 1950s and evidence shows they are well governed and have fewer compliance issues than other plans. If MoF is going to require “evidence” of action by fiduciary boards then this should be part of a pension sector-wide change – not one applicable to MEPPs alone.
  9. Filing changes with the regulator to funding and benefits and governance policies is also onerous. Also note that this is not required in any other pension jurisdiction where these polices are required – ie British Columbia, Alberta and others. In addition, much of this information will already be provided regularly in other filed documents. For example, each actuarial valuation report will be required to state the plan risks, provide stress testing on these risks, and document how the PfAD was developed. This is much of the information that will be covered in the funding and benefits policy.

COMMUNICATIONS

MEBCO supports that all pension plans have a communication policy. As for other recommendations MEBCO does not agree with the prescriptive elements of the MoF proposal. Fiduciary boards know their plan membership including the need for complete, accurate and timely communications given in plain language appropriate to the issue and plan demographics.

The content of MoF’s communication proposals for new members, adverse amendment notices and annual statements is onerous and not repeated in other sectors. For example, single employer plans are not required to explain what would happen in the event of a business closure or receivership nor the limitations of the pension benefits guarantee fund (PBGF). MEPPS already have disclosure requirements to inform members their benefits are not covered under the PBGF. MEPPs already have disclosure requirements communicating benefits are not guaranteed and may be increased or decreased subject to plan funding and legislation. 

MEBCO agrees that all plan members should be informed about where they can locate key plan governance documents such as the funding and benefits policy. 

CONVERSION

MEBCO has been clear that it disagrees with plans being required to send notices to contributing employers regarding conversion to target benefit. The employers' contributions requirements are set out in a collective agreement or participation agreement. The conversion of a plan to a target benefit plan will have no impact on an employer's obligation so a notice sent to employers will, at best, be disregarded and, at worst, will create unnecessary confusion. This could mean a substantial additional expense for many MEPPs and we have been informed by many employers that the communication is not needed nor necessary. 

Thank you for the opportunity to provide these additional comments on the Second Consultation of the Permanent Framework for Target Benefits.

Yours truly, 

Alex McKinnon, President

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