British Columbia Multi-Employer/Target Benefit Plans Funding Relief 2020
May 11, 2020
Honorable Carole James
Minister of Finance
1084 Fort Street Victoria, BC
Re: British Columbia Multi-Employer/Target Benefit Plans Funding Relief 2020
Throughout the last decade many Multi-Employer Pension Plans (MEPPs) in western Canada have made plan amendments (including conversions to Target Benefit (TB) Plans) to address their prior funding challenges. For the most part, these plans are fully funded (with reasonable surplus levels); in fact, many were in discussions with members about how to utilize the surpluses established. The biggest challenge for MEPPs was navigating through the new and changing regulations surrounding Defined Benefit (DB) plans and TB plans. Specifically, the most significant challenge was the volatility of the TB plan PfAD and its impact on the funding of TB plans. In practice, the methodology applied for the TB plans’ PfAD was leading to increased volatility of pension funding and ultimately needlessly increasing the risk of benefit reductions, rather than its intended purpose to reduce the risk of a reduction. With the introduction of new DB funding rules in late 2019, there was a renewed focus on the PfAD rules for TB plans.
Immediately after their release, there was a recognition of the disconnect between the methodology used for determining DB PfADs and TB PfADs. There is now a more stable, economically dynamic, and generally lower PfAD in a DB plan than what is required in a TB plan.
The COVID-19 crisis has brought forward a real example, one in which plans are currently dealing with, of how the TB and DB regulations will impact plans in a time of financial crisis, a time in which the “new” pension regulations are supposed to be designed to protect plans. The crisis has led to a significant impact on investment markets, low interest rates, and stalled economic activity.
Although MEPPs are coming off very strong 2019 returns, it currently appears that MEPPs could experience negative returns in 2020, along with interest rates near zero, and significant reductions to contributions due to severely reduced work hours in many industries.
1 Multi-Employer Benefit Plan Council of Canada (MEBCO) 34 Queens Drive, York, ON M9N 2H4 www.mebco.org
Although plans have a PfAD required in their funding, the current incarnation of the TB PfAD is not useful in a falling interest rate environment. Ideally, the PfAD in contributions would be used to offset the corresponding increase in normal cost during these periods; however, this is currently not the case and many plans may be faced with reducing future service accruals to pay for exorbitant PfADs even if the total cost of next years’ accrual is less than the contributions made to the plan. Under the current funding rules, few plans can fully use these margins as the PfAD funding requirements are not dynamic to the changing economic cycles they should be designed to protect members from. This is analogous to telling someone to save for a rainy day. However, when times get tough, rather than using that saved money to help pay expenses, you instead ask them to save even more in their rainy day fund.
A global recession will likely occur. With the collapse of investment markets, commodity markets, and uncertainty surrounding COVID-19, it is not clear how long, or how deep, any recession will be. However, it is also not clear how fast or how big any recovery will be. Globally, governments appear to be keen to stimulate the economy, but any recovery is likely years, away.
Pension funding requirements are intended to provide some level of security to plan members that their accrued pensions (including pensions in pay) will be honored and that the accumulation of those benefits will be stable throughout one’s career and retirement. Benefit security must be balanced with benefit adequacy – greater benefit security comes at the cost of lowering the level of benefits. Further, benefit security also needs to be weighed against equity between generations of members. Too much security now, could mean a windfall for future generations.
MEPPs provide good pensions and a high level of retirement financial security to members. However, although benefit levels are reasonable, contractual indexing (either pre- or post-retirement) is non- existent and post-retirement death benefits usually come at a cost to the retiring member (by way of a smaller pension). The only meaningful ancillary benefit that is often provided is early retirement, which is appropriate given the nature of the work for many of those in the MEPP industries, such as construction.
Thus, although MEPPs provide a high level of financial security, pensions in MEPPs are not as high and do not have the same ancillary benefits as those provided in the public and broader-public sector plans. It would, therefore, be very harmful if funding rules resulted in benefit reductions, especially at this time.
It is unreasonable to increase benefit security through more restrictive PfAD funding requirements during stressed economic times. This is especially true in the current environment of general public uncertainty and a depressed economic period that is inevitably temporary. In other words, simply applying current funding rules will likely result in immediate cuts to future pension accruals, even though many MEPPs and TB plans will continue to have funding surpluses and contributions that are greater than the expected cost of accruing benefits. This could have a devasting effect on the confidence that many MEPP/TB plan members and pensioners have in their plans, while trying to survive the current health crisis. MEPPs with or without target benefit provisions, like all pension plans, are long-term financial vehicles. Reductions in pension accruals now necessitated by PfADs that are far too high, does not meet plan goals of benefit security and stability.
As a result, a key tenet must be to maintain current benefit levels – both accrued pensions and pensions currently being earned, especially if there is a good chance they can continue to be provided in the long term. This can only be achieved if minimum funding requirements are relaxed during this unprecedented time.
2 Multi-Employer Benefit Plan Council of Canada (MEBCO) 34 Queens Drive, York, ON M9N 2H4 www.mebco.org
Short-term Funding Relief
The B.C. Government has already recognized that there are challenges with the current TB plan funding rules as they relate to PfADs. It is important that the challenges to TB plan funding rules are addressed over an appropriate time frame. We support the review and changes to the rules but recommend that some immediate action be taken for MEPPs.
Two specific short-term funding relief mechanisms could be:
(1) Temporary PfAD Funding Suspension: TB plans would, with the filing of their next valuation (which could be as early as December 31, 2019), be permitted to exclude the PfAD from their future service funding test. TB plan trustees, and their service providers, are currently expending effort to avoid potential benefit reductions (via the timing of valuations) that may result from the current PfAD rules. As the government has already recognized the need for these rules to be revised, any efforts directed toward navigating within current rules is unnecessary and puts a strain on the already limited resources considering the focus on coronavirus recovery. The temporary suspension would continue until the government revises its rules for how the PfAD is calculated. This change would have no cost to the government.
(2) Deadline extensions: The province has allowed for some extensions for required pension filings
within the published COVID-19 relief measures released earlier this month.
There are several MEPPs that do not have a December 31, 2019 plan year-end and do not have a valuation due date in 2020. Regardless of the plan year-end dates, all plans will feel the same impacts of the looming recession. In anticipation of the challenges of a recession, it may be advantageous for plans to file an off-cycle valuation to allow for an additional 3-years before the next filing. Although plans could change their year-end date to accomplish this goal it will lead to unnecessary expense and member confusion.
All regulatory filings and information disclosures due within the calendar year 2020 should be extended; specifically, AIRs, financial statements, and member statements would have a revised deadline of 240 days after the plan year-end; and actuarial valuation reports and actuarial information summaries, including off-cycle valuations, would have a revised deadline of 360 days after plan year-end.
Long Term Funding Regime
As stated earlier herein, B.C. has made significant progress in developing regulations to establish a funding regime that is better suited for MEPPs and TB plans. That said, the current crisis highlights how well-intended changes can lead to instability for plans that are relatively well funded. We encourage the government to consider setting up standing technical advisory committees to support the Superintendent of Pensions, particularly in times when the financial environment is rapidly changing.
We appreciate your urgent consideration of these matters. We will make ourselves available to answer any questions or assist with the details of any legislative proposals at your convenience.
3 Multi-Employer Benefit Plan Council of Canada (MEBCO) 34 Queens Drive, York, ON M9N 2H4 www.mebco.org
Robert Blakely President firstname.lastname@example.org
c.c.: Acting Superintendent of Pensions, B.C., Michael Peters
4 Multi-Employer Benefit Plan Council of Canada (MEBCO) 34 Queens Drive, York, ON M9N 2H4 www.mebco.org
MEBCO was established in 1992 to represent the interests of multi-employer benefit plans (MEPs) in Canada. MEBCO advocates on behalf of all stakeholders involved with MEPs, including union and employer trustees, independent and professional trustees, professional third party administrators, non- profit or “in house” plan administrators and professionals including actuaries, benefit consultants, lawyers, investment managers, and chartered professional accountants. MEBCO’s Board of Directors is composed of volunteer representatives of these groups, and is responsible for identifying, addressing, and advocating with respect to all issues impacting multi-employer plans in Canada.
Background on Multi-Employer Plans
Multi-employer plans are essential to over one million workers and their families in industries including construction, food service, retail, hotel and restaurant, graphic arts, garment manufacturing, security, textiles, transportation and entertainment. MEPs are a response to the difficulties of delivering quality health care services, disability and other income replacement benefits and life insurance to workers and their families in industries typified by small employers and mobile work forces. These plans ensure that seamless benefit coverage is provided to workers and their families as they move from one contributing employer to the next. This seamless coverage is especially important in mobile and/or seasonal industries where it is often expected that workers will be employed by multiple employers in a single year and/or may experience significant periods of non-employment or disability. In these industries, it is not uncommon for a worker to be employed by one employer for a matter of days or weeks before moving on to a different project with a different employer. A centralized MEP ensures these workers have access to necessary benefit coverage regardless of the sometimes intermittent nature of these work relationships.
In addition to providing seamless benefit coverage, MEPs are economically efficient in the sense of providing economies of scale by bringing together large numbers of smaller employers who receive financial savings in respect to administration and the purchasing of benefits. In other words, the pooling of collectively bargained contributions in these industries is beneficial both to workers and smaller employers who may wish to extend benefit coverage to their workers.
MEPs are generally administered by an independent board of trustees, comprised of an equal number of trustees appointed by the participating union or unions and employer bargaining associations. As with any trust, the MEP trustees owe a fiduciary obligation to act in the best interest of the trust beneficiaries, not the sponsoring employers or unions. The trustees do not determine the contribution rates, which are negotiated between the employers and the unions as part of the collective bargaining process. The contribution rates are typically based on hours worked.
MEPs deliver health and welfare benefits and services that are supplementary to publically funded health care and social security programs through privately funded vehicles. Without MEPs, millions of Canadians would not have access to these supplementary benefits, the cost of which would otherwise be unaffordable and may ultimately be borne by public programs.
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