Defined benefit workplace pension plans should be considered an essential component of the pension system in Canada.
To continue to be successful, they must:
1. provide plan members with reasonable confidence that the promised benefits will be paid, and
2. offer plan sponsors reasonable predictability of costs.
Confidence on the part of plan members and beneficiaries requires both adequate funding of the benefits and the development of an environment in which plan sponsors are encouraged to maintain and appropriately fund defined benefit plans.
Plan members and beneficiaries are entitled to expect timely, accurate, complete and understandable information on benefit entitlements, costs and risks.
Predictability of costs requires both the proper measurement and appropriate reporting of funding requirements and of the associated risks, and an enabling regulatory environment.
There must be an equitable treatment of the consequences of risks undertaken, which is clearly articulated and understood by all stakeholders.
1. Workplace pension plans are a critical component of the pension system in Canada.
2. Both defined contribution (DC) and defined benefit (DB) plans have their place in this system. DC plans allow participants to make and benefit from personal investment choices. DB plans offer their members a greater degree of certainty as to the benefits payable on retirement.
3. In the last two decades of the 20th century, economic and other conditions created surpluses in DB plans which were, in many cases, used to increase benefits or reduce contributions.
4. Since 2000, economic conditions (e.g., stock market fluctuations and declining long-term bond rates and other compounding factors), have put the vast majority of DB plans into a deficit position, leading to increases in contribution requirements and fears that benefits may not be paid. The financial crisis of 2008-2009 has exacerbated an already poor situation.
5. Pension costs (as currently measured) under DB plans are increasing as the population ages.
6. Court decisions and legislative and regulatory changes on such matters as surplus allocation and disposition (both before and on full wind-up) under DB plans have created unanticipated costs and uncertainties for plan sponsors. This has contributed to plan sponsors’ reluctance to fund above minimum levels. Reduced funding is not in the best interests of plan members.
7. Funding with safety margins is desirable for greater benefit security, but it must be accompanied by clear rules on surplus utilization should the margins prove not to be required.
The Roles and Responsibilities
1. The Plan Sponsor (which may include the plan members) adopts and amends the plan, sets the funding policy, and funds the plan within the boundaries set by applicable legislation.
2. The Union (where applicable) negotiates with the Plan Sponsor the terms and conditions of the plan.
3. The Administrator (which may be the plan sponsor)/Board of Trustees/Retirement Committee sets the investment policy, pays the benefits and reports to the regulator.
4. The Legislator/Regulator promotes development of pension plans; protects plan members’ benefit security by setting funding rules and monitoring their application; and monitors administration of the plans for compliance with legislation.
5. The Accounting Profession establishes rules and guidelines for reporting the impact of the pension plan on the plan sponsor’s financial statements.
6. The Actuary measures and reports on the current funded status of the plan and the future contributions required to maintain its financial health, and the implications of (including the uncertainties of) the plan’s investment and funding policies and their impact on future contribution requirements and funded status.
7. The Plan Sponsor, or other parties, may engage the Actuary or other Consultants to advise on the design, funding and investment policies and the administration of the plan.
8. The Canadian Institute of Actuaries establishes the code of conduct, guiding principles and monitoring processes for actuaries, all of which support the guiding principle that the public interest is paramount.
9. The Actuarial Standards Board establishes the Standards of Practice which actuaries follow.
Plan Members and Other Stakeholders
1. Plan members, retirees and other beneficiaries expect to be paid the benefits that they have been promised. They expect timely, transparent, reliable and consistent information about their benefits and other entitlements, as well as on the financial and funded status of the plan. They also expect to have their say in the evolution of the plan, commensurate with their interests.
2. Shareholders/Financial Analysts expect timely, transparent, reliable and consistent information about the sponsoring organization’s past and future pension obligations and the assets earmarked to pay for them.