BC issues consultation paper on solvency funding reform
On October 22, 2018, the B.C. Ministry of Finance issued a consultation paper providing options for reforming the funding framework for defined benefit (DB) pension plans registered in British Columbia. Broadly speaking, the consultation paper proposes either modifications to the current solvency funding regime, or the abolition of solvency funding and its replacement with enhanced going concern funding. These options are similar to proposals recently seen in other provinces such as Ontario, Nova Scotia and Manitoba.
The objectives of the review are to protect benefit security, provide contribution predictability to employers, support pension plan sustainability, and to maintain DB pension coverage.
The consultation paper identifies the following issues that have created financial difficulties for DB pension plans:
- Contribution volatility for both employers and employees that makes planning difficult;
- Procyclical contribution requirements that increase during periods of economic distress;
- Solvency rules are considered short-term funding rules in the case that the plan was immediately wound up, while many pension plans are long-term commitments. The costs of these funding rules make it harder for employers to invest in their businesses and can result in reduced wages and other benefits for employees; and
- Employer concerns over excess funding and surplus being difficult to withdraw.
Options for Reform
The proposals are similar to proposals that were made in the Ontario solvency funding review in 2016, which led to 2018 funding reforms, and the ongoing Nova Scotia and Manitoba solvency funding reviews. There are also similarities to the funding reforms adopted in Quebec in 2016.
Approach A: Modified solvency funding
Approach A would modify the current solvency funding requirements to attempt to achieve the objectives of the review. Approach A could involve one or more of the following options:
- Lengthen the five year amortization period (e.g. to ten years) for a solvency deficit which would reduce volatility and the size of payments.
- Consolidate solvency deficiencies to reduce volatility and the size of payments (i.e. have a fresh start and begin a new five year amortization after every valuation instead of continuing with existing payment streams);
- Use smoothed asset values to reduce volatility;
- Use an interest rate average over a specified period to reduce volatility;
- Fund less than 100% of the solvency liability to reduce the size of payments while still providing some level of benefit security.
Approach B: Replace solvency funding with enhanced going-concern funding
Approach B would eliminate solvency funding altogether and replace it with enhanced going concern funding requirements. The two options for enhancing going-concern funding would be as follows:
- Shorten the fifteen year amortization period for a going-concern deficit;
- Require a provision for adverse deviation (PfAD) which would provide added benefit security. The PfAD could be determined based on the investment policy, plan maturity, benefit provisions and/or the financial strength of the employer.
Commuted value transfer rule modification
An additional reform measure was proposed that could be used with either approach above. This involves modifying the commuted value transfer rules to provide a benefit that balances the interests of the remaining members with the ability to transfer benefits out of the plan. This could be accomplished by adjusting the interest rate used in the calculation higher in order to produce a lower transfer value.
Employers with DB pension plans registered in British Columbia will welcome the solvency funding review and hope that it leads to concrete reform measures in the near future. The release of the consultation paper confirms the trend towards solvency funding reform across Canada.
In conjunction with the review, British Columbia is also forming a Stakeholder Advisory Committee to provide input as well as focused consultations with specific stakeholder groups such as employers, unions, plan members and pension industry advisors.
Comments can be submitted until December 14, 2018. Morneau Shepell will be one of the stakeholders making submissions.