Multi-Employer Benefit Plan Council of Canada
June 14, 2016
Tami Dove
Senior Policy Analyst, Pensions Division
Financial and Consumer Affairs Authority
Suite 601, 1919 Saskatchewan Drive
Regina SK S4P 4H2
Via email: tami.dove@gov.sk.ca
Dear Ms. Dove:
MEBCO was established in 1992 to represent the interests of Canadian multi-employer pension and benefit plans (MEPs). We consult 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, 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 health coverage to over 1,000,000 Canadians.
MEBCO represents all stakeholders in negotiated cost target benefit multi-employer pension plans (“MEPPs”) – employers, unions, and professionals. We agree that MEPPs do not fit well into the traditional single employer regulatory model, and support the creation of a MEPPspecific regulatory framework. Creating such a framework requires the intimate knowledge of such plans, and specifically the differences between plans, that can only come from years of hands-on experience. We therefore strongly recommend that a small group from MEBCO meet with Financial and Consumer Affairs Authority (“FCAA”) staff early on for an educational session, so that the FCAA staff members involved in this project have a better appreciation of the challenges facing such plans and the similarities and differences among plans that should influence the regulatory framework that is being considered.
MEBCO is pleased to offer its submission on this core topic for our constituents. While we will address the specific questions in the Consultation Paper (“CP”), we believe it will be helpful if we start with a summary MEBCO’s guiding principles with respect to target benefit MEPPs.
We make the following comments on the Consultation Paper in the context of MEBCO’s guiding principles.
a) The CP reflects the government’s view of favouring benefit security over benefit adequacy. With a fixed negotiated contribution, that inevitably means lower benefits for current retirees than a MEPP can reasonably afford to provide.
b) Some of the proposals in the CP create a regulatory framework that potentially compels intergenerational inequity, which is undesirable.
c) The CP focuses primarily on funded levels. For an ongoing MEPP, that 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. MEBCO suggests that any measures of plan health, of the need to reduce benefits, of the opportunity to increase benefits, etc., be based on the relationship between contribution income and actuarially calculated cost, not based on funded ratios.
d) Part of the CP relates to the proper measure of transfer values. Those concerns all disappear if the requirement to pay transfer values is eliminated altogether for MEPPs – a change that MEBCO supports. A worker’s union has negotiated a defined benefit type pension for its members. There is no obvious reason why a terminating employee should have the option to convert that negotiated benefit into a defined contribution balance.
This is particularly true for broad-based MEPPs, where portability is automatic among all participating employers. With respect to Section 4.4 of the CP, MEBCO opposes the grandfathering of the CIA CV methodology with respect to conversion date accrued benefits, because of the added administrative costs, the absence of solvency funding for those accruals, and the inconsistency with other jurisdictions.
Our comments on the specifics of the CP follow. Overall, we are concerned that the CP is proposing simple rules that can be applied mathematically to all MEPPs. However, the reality is that MEPPs vary substantially from each other in important ways. What is reasonable for a large national industrial plan may make no sense for a local construction plan. To the extent that the FCAA is looking for backing for simplistic mathematical rules, we cannot be supportive. Thus, we are more inclined to favour giving regulatory discretion and review powers for principlesbased regulations than to establish bright lines that apply identically to all MEPPs under all circumstances. We recognize that this is more of a regulatory challenge, but the trustees, with the assistance of their advisors, have the knowledge to reflect differing circumstances differently.
The government often passes laws that prohibit treating similar circumstances differently; it should not require treating different circumstances the same.
Part 1: Introduction & Background
Q 1 With respect to each Part, are there any additional concerns or considerations that you wish to identify?
Q 2 Do you agree with the principles?
A 1/2 As is clear from our introduction above and our responses to the specific questions below, MEBCO has significant concerns with some aspects of the CP.
Part 2: Funding
Q 3 Do you agree with the proposed funding requirements, including the method of calculating the PfAD?
A 3 MEBCO supports the elimination of solvency funding requirements, but sees no value in calculating what the required solvency funding requirement (with five-year amortization) would be if solvency funding did apply.
As indicated above, a PfAD is only relevant at the time when benefit changes are being considered. At that time, plan maturity, demographics, employer diversity, presence or absence of a dominant employer, investment policy, risk of future decline in covered employment, risk of disruption to employers, benefit adequacy, and even the actuarial cost method and assumptions are all potentially important factors. MEBCO could support requiring that the Pension Division be given a “benefit change report” that outlines the analysis and reasoning that went into a proposed change, along with a 60-day period during which the Pension Division could either approve the change, deny approval, or request further information. MEBCO does not support a one-size-fits-all mathematical test.
Note that a PfAD is likely to compel intergenerational inequity. It forces lower benefit levels than a plan can reasonably afford while the PfAD is being funded. Once the PfAD is funded, future plan members reap the benefit, which was funded by prior generations of members.
Further, it is reasonably likely that the PfAD will prove unnecessary, thus enabling benefit improvements for a later generation that were paid for by an earlier generation.
Q 4 Should the rules be more prescriptive regarding the funding policy for an NCPP (e.g., require that such plans have a funding policy; set out the minimum contents of a funding policy)?
A 4 First, the term “funding policy” is a misnomer. Funding is determined by the bargaining parties, not the trustees. Better terminology would be “benefit policy,” since that is what the
trustees control. As with other elements of the CP, bright line rules are, in MEBCO’s view, counterproductive. The concept that there is a benefit policy with a specific advance set of priorities for benefit changes sounds attractive. However, the need to reduce benefits can come
about as the result of a variety of different circumstances, and having a simple solution for a complex problem will inevitably lead to sub-optimum decisions. A benefit policy could
reasonably outline the process that the trustees will use when benefit changes are being considered, but a policy constraining the actual decisions, or giving participants advance notice
with respect to unknowable future changes, is counter-productive and likely to lead to bad decisions and/or litigation.
Q 5 Is stress testing an appropriate way to understand the risks of an NCPP? A 5 MEBCO reminds the FCAA that, for a target benefit MEPP, any mandated governance costs come out of resources that would otherwise be used for benefits. Stress testing is unquestionably desirable for most MEPPs. However, what testing is useful and justifiable by a ost-benefit analysis will vary widely. MEBCO therefore suggests that stress testing be encouraged as part of good governance, but not mandated.
Part 3: Benefit Improvements & Benefit Reductions
Q 6 Do you agree that an NCPP should have AGCE in order to improve benefits? A 6 MEBCO’s view is that, at the time benefit improvements (or reductions) are being considered, Trustees should be sure that any such changes leave the MEPP with a prudent margin of projected contributions compared to projected actuarial costs on a collective basis (i.e., with respect to the benefits and contributions for the entire plan, not just for the change being considered). MEBCO does not support a test that looks only at actuarial liabilities without considering the totality of costs and contributions. 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.
Q 7 Do you feel that there should be rules in the Regulations regarding the order of benefits to be reduced to meet the solvency tests?
A 7 The more that trustees’ hands are tied, the more likely it is that they will be forced to take actions that may make little or no sense under the circumstances at the time. Therefore, MEBCO opposes mandatory priorities for benefit reductions. For example, reductions may be needed due to declining employment, changes in mortality, changes in retirement patterns, investment osses,
etc. Some of these causes are solely related to active employees, others are not. Reductions to pensions in pay status may be more tolerable for those with higher benefit amounts than to those
with more marginal income. Plan maturity may impact how effective different reductions will be, and what magnitude of margin is acceptable. Reversing recent improvements may or may
not be acceptable. Most important, the need for reductions is rarely due to a single cause, so judgment is required to achieve a fair balance.
Part 4: Benefit Types
As mentioned earlier, MEBCO prefers to have transfer values eliminated altogether. Further,MEBCO strongly opposes the bifurcated methodology of subsection 4.4, and would like there to
be a uniform national methodology for determining transfer values for MEPPs (or at least a single rule with respect to participants in a particular plan). For example, MEBCO notes that the
new Québec regime for MEPPs computes funded transfer values on a solvency basis, whereas other jurisdictions, including Saskatchewan, are considering a going concern model.
In the absence of uniformity of transfer values by jurisdiction for a multi-jurisdictional MEPP, the Trustees may well choose to provide lower retirement and disability pension benefits to members in jurisdictions that mandate higher transfer values, which would be confusing and hard for participants to accept.
Q 8 Would the NCPPs that you are involved with be interested in GC CVs?
A 8 Subject to the comments above, MEBCO believes that most trustees would welcome the GC CV model. It encourages leaving one’s pension entitlement as a deferred defined benefit annuity, which is what was bargained for in the first place, and it avoids treating terminated mployees more favourably than continuing employees if a benefit reduction is required. In addition, GC CVs facilitate more equitable and appropriate outcomes for career employees.
Further, this approach is consistent with the manner in which the pension benefits are funded. Q 9 Are there any significant issues respecting preparation of an AVR, member
communications, or inequity where an NCPP provides for both methodologies of calculating commuted values (i.e., CIA CV and GC CV)
A 9 As indicated above and in A 12, MEBCO feels strongly that no plan should be required to compute transfer values on a bifurcated basis. An AVR is more complex and expensive to produce with multiple transfer value rules. Workers who imagine that they should have similar transfer values may well be confused when this turns out not to be the case. And there will be a
clear inequity if benefits need to be reduced and a terminated former member who has received a full CIA CV is protected from the impact.
Q 10 What are your views on the proposed methodology used to calculate the GC CV?
A 10 MEBCO is supportive of the proposed GC CV methodology.
Q 11 Given that members could be entitled to a GC CV (a CV that reflects the funded status), should plans that use the GC CV methodology be required to file periodic updates on their funded position to ensure that commuted value more accurately reflects the funded position of the plan at the time of transfer?
A 11 MEBCO agrees that the volatility of investment markets and employment means that there needs to be some adjustment process between AVR filings (which themselves are not due until nine months after the valuation date). Therefore, MEBCO supports a uniform, simplified updating process, no more frequently than quarterly, that is primarily or exclusively driven by asset changes and that does not require updated actuarial liability calculations.
Q 12 Should the ability to convert past benefits calculated using the GC CV methodologies be provided at this time to NCPPs?
A 12 MEBCO strongly supports having post-conversion transfer values computed solely on GC CVs. The CIA CV regime assumes solvency funding is continuing, so that within five years today’s solvency liability will be fully funded. That will not be happening under the proposed regime. In addition, it is complicated to administer and explain and, as mentioned in A9, treats similarly situated participants differently.
We assume that the proposal to bifurcate the transfer value is somehow intended to fully preserve accrued benefits. But the accrued retirement benefits are not being guaranteed; they are subject to reduction, and always were. Further, the default entitlement is the deferred annuity, not the transfer value. The transfer value is an option. It should not be treated more favourably than the annuity that is primary.
Part 5: Communications Q 13 Is the communications framework appropriate for NCPPs?
A 13 MEBCO supports full disclosure to MEPP participants. However, we are aware that a communication that is more than a page or two is counterproductive, as it will not be read at all.
Subsection 5.1 may well cross that line, with all its proposed required explanations of technical matters. MEBCO suggests that the useful additional disclosure consists only of the following:
? The NCPP’s going concern funding ratio, and a statement that transfer values will be paid based on that ratio, which may be updated from time to time, for plans using GC CV. ? A statement that benefits, in the event of adverse plan experience, can be reduced.
Part 6: Administration & Governance
Q 14 Should there be more or less rules regarding NCPP governing bodies (Administrator and/or sponsor)? For example, should the regulations prescribe the proportion of plan members and retirees, presence of independent trustees, required knowledge and skills, etc.? A 14 MEBCO supports maintenance of the status quo with regard to administration and
governance, consistent with the CP.
MEBCO strongly opposes requiring any constituency to be represented as a voting trustee, because trustees are charged with representing all participants in an even-handed way, which
would be difficult or impossible for a trustee representing a particular constituency. MEBCO does not object to independent trustees, but sees no value in compelling their presence,
given the likelihood that they would lack knowledge of the industry and its employers and workers and that they would need to be paid, thus depleting plan assets that would otherwise be
available for benefits.
MEBCO opposes the imposition of a required knowledge and skill set for trustees. The most important attribute of a trustee is often knowledge of the industry and its employers and workers.Subject expertise can be achieved through education, experience, and retention of capable
advisors and should not be compelled. Further, it would be difficult or impossible to define such a requirement, and in some cases would make it difficult or impossible to recruit qualified persons to serve as trustees.
Q 15 Should the legislation or regulations be more prescriptive regarding the governance policy for NCPPs (e.g. require that such plans have a governance policy; set out the
minimum contents of a governance policy)?
A 15 MEBCO believes that governance policies are desirable for all plans, and that the current CAPSA guidance is sufficient in that regard. MEBCO sees no reason to distinguish MEPPs from other plans in this respect.
Part 7: Transition Rules
Q 16 Is the transition framework appropriate?
Q17 Have all issues been addressed? Do you agree with transitioning the PfAD on the CSC over a 3 year period?
A 16/17 In view of MEBCO’s strong objection to the PfAD concept as presented in the CP, we have no comment on the proposed transition to it. Our view is that it should not be implemented at all. We do agree that any change in CV methodology should be accomplished by a plan amendment.
Part 8: Additional Considerations
Q 18 Do you feel the “Enhanced Going Concern” option would be an acceptable regime as opposed to the Proposed Regime?
A 18 MEBCO finds the Enhanced Going Concern model to be preferable to the Proposed NCPP Regime, but it is still flawed in a number of respects. Specifically:? GC CV should be permitted.
? Any limitations on benefit improvements should be flexible and based on the relationship between projected contributions and actuarial costs, not on the funded ratio.
Reducing the amortization period from 15 years to 10 years is preferable to continuing solvency funding, but it forces lower benefits (given that contribution income is fixed) than a MEPP can reasonably afford to pay, and is likely to compel intergenerational inequity. For example, as each amortization period ends, the actuarial cost decreases, the contributions stay
the same, and therefore there is a sudden available margin to increase benefits for a later generation that has been paid for by an earlier generation’s contributions. Q 19 Should a framework similar to the Proposed Regime be an option available to other types of pension plans registered under the Act?
A 19 MEBCO’s constituency and expertise are limited to MEPPs, and therefore we offer no
opinion on this question.
Q 20 What issues do you foresee will need to be addressed with respect to GC CVs andmulti-jurisdictional plans?
A 20 MEBCO is concerned with respect to any mandated differences in benefit rules that vary by jurisdiction for a multi-jurisdictional MEPP. Trustees are likely to adjust the retirement
benefits for career employees downward so that identical contributions in different provinces buy benefits with the same total value. For example, if Province A mandates CIA CVs aProvince B permits GC CVs, one possible outcome is that identical career employees will retire on smaller
benefits if they worked in Province A than those who worked in Province B. Besides the inherent inequity and participant confusion of such an arrangement, there will be administrative headaches with respect to participants who worked in multiple provinces, moving around the country as work opportunities changed.
MEBCO is also concerned about funding rules applicable to MEPPs that differ by province. Forexample, the Federal jurisdiction continues to require solvency funding for MEPPs. We are
aware of a national MEPP registered in a province with a solvency moratorium that refused to accept a large Federal jurisdiction employer because of a concern that this would have created
the risk of the plan’s registration being transferred at some later point to the Federal jurisdiction, which would have brought it under solvency funding and compelled benefit reductions for allparticipants nationwide. Until recently, Québec prohibited reductions in accrued benefits for MEPPs. MEBCO is aware of national plans that excluded Québec employers altogether, as well as national plans that spun
the Québec portion of the plan off into a separate plan to avoid “contaminating” participants in the rest of Canada with certain adverse consequences of the Québec SPPA.
Part 10: Closing comments
Q 21 Please provide any additional comment or information related to this paper.
Many of the challenges for MEPPs have resulted from the historic attempts to “shoehorn” MEPPs into the same regulatory scheme that applies to single employer defined benefit plans. MEBCO applauds and supports the fundamental concept of the CP – that MEPPs are different and need a different regulatory scheme in order to serve the participants and their employers well.
MEBCO reminds the FCAA that the target benefit MEPP model is the success story among the otherwise bleak picture of private sector defined benefit type pension plans. Indeed, legislators are looking for ways to extend that model in hopes of stemming the rush to drop defined benefit plans for defined contribution plans or no retirement plans at all. As is apparent from the responses in this submission, MEBCO believes that regulatory micromanagingis unnecessary, inappropriate, and likely to accelerate the decline in defined benefit
type plans such as target benefit MEPPs – one of the few private sector defined benefit vehicles that is not disappearing. Most MEPPs are responsibly and successfully delivering benefits in a
cost-efficient manner without prescriptive government regulations. MEBCO supports regulatory authority to police the few “bad apples” effectively, but regulations telling trustees everything
they have to do under every circumstance, such as the CP reflects, are undesirable, and necessarily ignore the wide variety of different conditions applicable to different MEPPs at
different times under different circumstances.
MEBCO reminds the FCAA that, in the private sector, target benefit MEPPS have been stable while SEPPs are becoming dinosaurs. To the extent that the CP foreshadows a new regulatory
model for target benefit MEPPs that mirrors the objectives of the current SEPP framework, MEBCO is concerned that such new framework will reduce the attractiveness of MEPPs for
employers and workers, providing nominally better protection but in fact reducing the availability of DB-type pensions in Saskatchewan even further.
Also, the costs of compliance are reflected in lower benefits because the trustees must manage a plan within the limits of contributions over which they have no control. This suggests that any regulatory requirements be kept to those that are necessary to assure participants that the relationship between benefits and contributions is within appropriate limits and that
communication is transparent but not excessive.1
MEBCO representatives are available to meet with the appropriate legislators, ministers and FCAA staff to facilitate the process of establishing a new and appropriate regulatory framework for target benefit MEPPs. Thank you for the opportunity to express our views in this submission.
8386128v1/10388.003
Robert R. Blakel y
President
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