British Columbia pension funding reform proposals
The British Columbia (BC) Ministry of Finance released a report in August 2019 outlining a proposal for changes to minimum funding requirements for BC-registered defined benefit (DB) pension plans. The report suggests that changes to funding rules could be effective for valuations filed with valuation dates as early as December 31, 2019. The government began its review of the province’s solvency funding framework in late 2018 with the issuance of a consultation paper, which was summarized in the November 2018 News & Views.
Proposed DB funding framework
Under the proposed funding framework, DB pension plans would be funded on both a going concern and solvency basis.
The solvency funding rules would require DB pension plans to be funded to a reduced level of 85% of the solvency liability. Any solvency deficit would be consolidated at each valuation and amortized over 5 years.
The going concern funding rules would include a provision for adverse deviations (PfAD). The PfAD would generally be equal to the monthly long-term benchmark Government of Canada bond yield as at the valuation date multiplied by 5. The PfAD would be subject to a minimum of 5%, but no maximum. An adjustment to the PfAD would be made for plans that have an exposure of less than 30% to asset classes other than traditional fixed income investments. The PfAD would be calculated and required to be funded on both the going-concern liabilities and the normal cost.
Any unfunded going concern liability would be consolidated at each valuation and amortized over 10 years, instead of the current 15 years.
The proposed PfAD formula was developed with the objective of mitigating contribution volatility, reflecting the stakeholder committee’s view that interest rate risk is the main risk to which most DB plans are exposed. As at August 31, 2019, the required PfAD for plans with at least 30% of their target asset mix in non-fixed-income asset classes would have been 6.85% of going-concern liabilities.
Comments on the proposals were due by August 30, 2019. Morneau Shepell made a written submission on the proposals.
The proposed revisions to the funding framework for DB plans are generally welcome for BC pension plan sponsors. Reducing required solvency funding to a threshold of 85% represents an improved balance between benefit security and plan affordability, and is consistent with changes considered or implemented in other Canadian jurisdictions. Reducing the amortization period for going-concern deficits to 10 years is an appropriate measure, considering the reduction in solvency requirements and associated shift in emphasis to going concern funding.
The report states that the objective of the PfAD is to mitigate contribution volatility, not to enhance benefit security. However, we have concerns that the proposed formula to calculate the PfAD will often not accomplish this objective. A PfAD which moves only in line with the level of interest rates and not in response to any other plan experience would unnecessarily restrict plan sponsors’ ability to prudently manage contributions. Plan-specific dynamic margins, which are lower when a plan is more poorly funded and higher when the plan is better funded, would be a more effective mechanism in pursuing contribution stability. Our recommended revisions to the government’s proposal were set out in our written submission to the BC Ministry of Finance.