August 4, Debbie Lyon Superintendent of Pensions The Manitoba Pension Commission York Avenue Winnipeg, MB R3C OP8

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1 August 4, 2009 Debbie Lyon Superintendent of Pensions The Manitoba Pension Commission York Avenue Winnipeg, MB R3C OP8 Dear Ms Lyon: The Canadian Institute of Actuaries (CIA) is pleased to be offered this opportunity to submit its comments on the proposed regulation changes to the Pension Benefits Regulation. The CIA had presented its comments in 2003 and 2004 during the extensive consultations with stakeholders undertaken as a result of the Manitoba Pension Commission recommendations. The opinions of the Institute have not changed. We have therefore taken the liberty of attaching our two previous submissions for your convenience. Our submissions address the following topics: providing for the rights and obligations of pension committee and its members; expanding the disclosure requirements for plan members and other beneficiaries; prescribing ancillary benefits; providing for one-time transfer from pension plan, LIF or LRIF to prescribed RRIF; providing for lump sum withdrawal by non-resident; clarifying the requirements for lump sum on shortened life expectancy; clarifying the requirement for division of pension benefits and pensions on the breakdown of a relationship; and clarifying the requirements for plan termination or winding up and predecessor and successor plans. Should you have any additional questions, please do not hesitate to contact me. Yours truly, Robert C.W. Howard, FCIA, FSA President encl.: Submission by the CIA to the Pension Commission of Manitoba Comments on Proposals for Amendments to the Pension Benefits Act of Manitoba Submission by the CIA to the Pension Commission of Manitoba Comments on Proposals for Amendments to the Pension Benefits Act of Manitoba Reforms Document

2 Canadian Institute of Actuaries Institut Canadien des Actuaires SUBMISSION BY THE CANADIAN INSTITUTE OF ACTUARIES TO THE PENSION COMMISSION OF MANITOBA COMMENTS ON PROPOSALS FOR AMENDMENTS TO THE PENSION BENEFITS ACT OF MANITOBA January 31, 2003 Document

3 COMMENTS BY THE CANADIAN INSTITUTE OF ACTUARIES ON THE PROPOSALS FOR AMENDMENTS TO THE PENSION BENEFITS ACT OF MANITOBA...1 INTRODUCTION...1 PURPOSE OF THE SUBMISSION...1 SECTION I...2 GENERAL COMMENTS...2 SECTION II...3 COMMENTS AND OBSERVATIONS ON SPECIFIC PROPOSALS...3 EXPANSION OF PROVISION OF INFORMATION AND INSPECTION...3 PENSION PLAN ELIGIBILITY & MEMBERSHIP...3 ANCILLARY BENEFITS...4 VESTING OF BENEFITS...4 ENTITLEMENT TO PENSION...4 JOINT AND SURVIVOR PENSIONS...4 PORTABILITY OF BENEFITS...5 SHORTENED LIFE EXPECTANCY...5 FLEXIBLE PENSION PLANS...7 MULTI-UNIT/EMPLOYER PENSION PLANS...7 UNLOCKING FOR NON-RESIDENTS...7 PENSION COMMITTEE...7 DIVISION OF PENSION BENEFITS...7 SURPLUS...8 TESTS FOR SOLVENCY...8

4 COMMENTS BY THE CANADIAN INSTITUTE OF ACTUARIES ON THE PROPOSALS FOR AMENDMENTS TO THE PENSION BENEFITS ACT OF MANITOBA Introduction The Canadian Institute of Actuaries (CIA) is pleased to submit its comments on the Pension Commission of Manitoba s paper on proposals for amendments to the Pension Benefits Act of Manitoba. The CIA has more than 2,000 members across Canada. Many of these members work in the pension plan area and are involved in the design, administration and funding of pension plans by working with plan sponsors, unions and trustees to design, finance and administer their pension plans. They have played a major role in the creation of pension plans and government income security programs, and in establishing the funding required to ensure the viability of these plans and programs. One of the CIA s goals is to assist legislators in developing pension plan legislation that efficiently meets the needs of all parties. Through its relations with government officials, the CIA tries to promote legislative intervention conducive to the effective and efficient management of pension plans, while best meeting the interests of all parties involved in the pension program. Purpose of the Submission This submission is a result of a review of the publication by the Pension Commission of Manitoba titled Proposals for Amendments to the Pension Benefits Act of Manitoba. The purpose of this submission is to provide comments on the proposed areas of amendment and add to the insights of the other parties interested in this matter. 1

5 SECTION I General Comments It has been nearly 20 years since the Manitoba Pension Commission has undertaken such a major review and amendment to its pension statutes. Back in 1983 the major changes contemplated were controversial and to some extent leading edge thinking in the pension area. Manitoba led the way with many of its changes and other jurisdictions soon followed, more or less, their lead. Since the mid to late 1980 s the pension legislation in Canada, though initially converging, has diverged somewhat in some areas. Uniformity is what multi-jurisdictional pension sponsors demand and that is what the CIA supports. The CIA has always advocated greater uniformity in the applicable pension legislation in the various Canadian jurisdictions. We strongly encourage that the ultimate legislation adopted by Manitoba be consistent with the model pension law being developed by the Canadian Association of Pension Supervisory Authorities. We are also concerned that some proposed amendments may unduly complicate the administration and communication of pension plans. Every effort should be made to eliminate any unnecessary administrative complexities. 2

6 SECTION II Comments and Observations on Specific Proposals Our comments are limited to those proposals where we feel specific comments are warranted. Expansion of Provision of Information and Inspection The CIA is in agreement that the disclosure of pertinent information promotes the understanding of pension plans among their members. In that context, your paper is proposing to make lists of plan investments and the most recent audited financial statements available on written request. It also proposes that contribution holidays be disclosed on the annual benefit statements provided to members. An important consideration should be not to create an undue burden on plan administrators. Audited financial statements can be provided easily to members when such statements are available. For many plans, lists of plan investments may not be readily available in a format which is informative for plan members. For example, in many situations, the plan will invest in one or more pooled funds or master trusts, which have been established solely to invest the assets of the various pension plans of one sponsor. Pooling of assets is also very often used for foreign investments. Lists of plan investments are also normally readily available only at month-ends. These practical considerations should be carefully taken into account before requesting disclosure of lists of plan investments. In our opinion, a common approach should also be developed regarding information disclosure between the various jurisdictions, including the communication of contribution holidays on benefit statements. It is very cumbersome for plan administrators with employees in different jurisdictions to comply with a diversity of requirements for plan members in these different jurisdictions. Pension Plan Eligibility & Membership While we agree with the stated objective of increasing participation rates in pension plans, we question the rationale for the proposal to maintain the requirement for compulsory plan membership as a condition of employment. This requirement distinguishes Manitoba from every other Canadian jurisdiction, and we believe that a lack of uniformity in legislation is a major obstacle to the efficient operation of pension plans covering employees across the country. 3

7 In this regard, we would emphasize uniformity of legislation across Canadian jurisdictions as a critical goal. Ancillary Benefits We understand that your proposal is to prohibit the so-called consent benefits in pension plans so that the member can determine his or her pension benefits by simply referring to the terms of the pension plan. We presume that your proposal would not prevent a plan sponsor or trustee from providing special pensions solely for the benefit of a member or a group of members, provided those special pension provisions are documented explicitly by way of a plan amendment. Vesting of Benefits The proposal for full and immediate vesting is not consistent with any other jurisdictions except Québec. Since we believe that uniformity is an important objective, we would recommend that you not pursue this proposal unless it is consistent with the consensus that CAPSA arrives at in the model law. Immediate vesting would also increase plan administration by requiring, in particular in some plans with large turnover, a significant number of additional calculations of very small benefits. Entitlement to Pension The proposal for members who continue employment after normal retirement age to provide the greater of: 1. the pension provided by continued accrual of pension benefits and 2. the actuarially increased normal retirement pension is difficult for members to understand, and is a communication challenge. Our view is that since the member currently has the right to continue to accrue a pension after the normal retirement age, adding the actuarially increased benefit is an unnecessary complication to the process. Also, it is inconsistent with the requirements of other jurisdictions. It is partially consistent with Québec except that Québec does not require pension accrual as a minimum after normal retirement age but only that the normal retirement pension be actuarially increased. Joint and Survivor Pensions Again, a change that would promote inter-provincial uniformity is greatly supported and since most jurisdictions went to a mandatory joint pension reducing to 60% on the member s death we support fully this proposal. 4

8 Enabling legislation to permit plans with a joint and 2/3rds normal form to apply the joint and 60% normal form to all periods of service would also be necessary. This is important to simplify the administration and communication of the plan benefits. Without such enabling legislation, we are concerned that a plan which is amended to change the normal form to 60% joint-and-survivor (for consistency with other jurisdictions) might be challenged as possibly reducing accrued rights for Manitoba members. Portability of Benefits Manitoba is the only jurisdiction that currently requires pension plans to allow commutation of an employee s pension entitlement right up to the normal retirement age. In some instances this has resulted in plan members making choices that work to the financial disadvantage of the pension plan. For example, if an active member has reached retirement age and is in poor health, he or she may effectively capitalize the value of the pension based on standard life expectancy and thereby gain a windfall relative to the value of the pension otherwise payable. From a public policy point of view, because the main purpose of a pension plan is to provide retirement income, we support the proposal to eliminate the requirement to allow commutation when a member qualifies for retirement with an immediate pension. Under your proposal, we understand that the commutation option would not have to be offered in all situations where the member qualifies for an immediate pension whether the pension is reduced or not. On plan termination, we appreciate that there should be different criteria for permitting portability, given the involuntary nature of the event from the plan members perspective. For that reason, we would support allowing portability for active members who were eligible for an immediate pension when the plan was terminated but had not yet begun to receive a pension. However, we do not believe that a similar option should be granted to members in receipt of a pension at plan termination, as this would carry a risk of financial selection against the plan and potential windfall gains for some pensioners to the detriment of other members. Shortened Life Expectancy We note that your proposal is to permit, but not to require a pension plan or a prescribed retirement benefit plan, to allow an individual to receive a lump sum payment only by reason of a terminal illness or physical disability. We would caution that any changes to the legislation in this area should avoid imposing unnecessary financial risks on defined benefit pension plans by requiring lump sum commuted value payments in circumstances where the payment is made entirely at the member s option, and where the member may exercise the option to the financial 5

9 disadvantage of the plan. For active members who request a lump sum payment on account of shortened life expectancy, the plan is not exposed to any greater than normal financial risk because portability is generally available anyway the only difference would be that the payment could be made to the member in cash rather than transferred to a LIRA. But for members whose pensions have begun to be paid, the portability option is not otherwise available, so there is an opportunity for pensioners in declining health to request a lump sum commuted value determined using more favourable life expectancy, thereby earning a windfall gain. It is therefore very important, in our view, that such a provision not be imposed upon pension plans, particularly for members who have commenced to receive a pension. The CIA had strongly opposed the Ontario Regulation 144 which is requesting all plans to provide such a lump sum whether the member has commenced to receive a pension or not. This Ontario regulation has created a difficult challenge for the CIA to develop a reasonable standard of practice to control the financial risk to the plan while being fair to the plan member. Although the CIA has developed this new Standard of Practice for the Computation of the Commuted Value of Pension Benefits in Cases of Reduced Life Expectancy, it still has concerns about the desirability of allowing an individual in receipt of a pension to elect to receive a lump sum due to a shortened life expectancy. Indeed, the lump sum to be offered to pensioners with shortened life expectancies should reflect the average present value of the benefits that they would forfeit by accepting the lump sum. Even though all persons affected by this option have shortened life expectancies, there could still be considerable variation from one person to another. That is, some of them could live less than one month, while others could survive for several years, notwithstanding the adverse opinion provided by their doctor. In the CIA Standard, the lump sum must be computed assuming the pensioner would survive for a period certain of four months from the date of computation. Some individual pensioners who elect the lump sum will die within four months, in which case the existence of the lump sum option will have increased somewhat the cost of the plan. A more serious problem is related to other individual pensioners who elect the lump sum and then live much longer than four months. In such cases, the lump sum will not be sufficient to replace the pension that they forfeited, so the individuals could end their lives enduring not only poor health but also severe financial hardship. If Manitoba decides to go ahead with its proposal nevertheless, it should clearly be an optional provision for a pension plan and, it should be clear in the Act that the commutation of pensions due to shortened life expectancy is to be made in accordance with accepted actuarial practice, i.e. in accordance with the new standard developed by the CIA and not the Recommendations for the Computation of Transfer Values from Registered Pension Plans which are used in normal circumstances. 6

10 Flexible Pension Plans The CIA supports the ability for a member to make optional ancillary contributions to provide additional pension ancillary benefits. Appropriate disclosure about the possible loss of these contributions and exactly what they can be used for is very important. Multi-Unit/Employer Pension Plans There are concerns with the forfeiture of former member benefits after a period as short as two years when such a former member cannot be located. Our view is that the period should be longer and perhaps five years would be more appropriate. Unlocking for Non-residents You propose unlocking funds for non-residents only once funds have been transferred to a LIRA, LIF or LRIF. We agree with this approach because it eliminates concerns about anti-selection regarding commutation of benefits under a registered pension plan for nonresidents. Under your proposal, it would therefore not be possible for a non-resident to commute a pension, which has commenced. Other former members of a registered pension plan would have to transfer the value of their pension to an individual registered retirement plan in accordance with the normal rules before applying for unlocking. Pension Committee There must be a consensus with the CAPSA model law since administration is very important and any legislation in this regard must be uniform. A pension plan can ultimately have only one administrator irrespective of whether it has participants in more than one jurisdiction. In a situation where a plan has members in more than one jurisdiction (e.g., Manitoba and Ontario), it is not clear how the requirement to have a pension committee would apply. Division of Pension Benefits This proposal is in line with other recommendations of the CIA on the handling of pension assets on marriage breakdown. We must caution that there are added administrative costs associated with maintaining the notional members of separating spouses. We recognize that the Deferred Settlement Method approach has some shortcomings, particularly in the case of amendments that improve the benefits after the 7

11 separation has occurred but many actuaries prefer this approach because, in their view, it provides a more equitable distribution than the Lump Sum Settlement Method. Surplus We firstly recommend that the situation be clarified regarding partial wind-ups. We believe that pension plans should not be required to distribute surplus upon the occurrence of a partial wind-up. In going concern situations, upon total wind-up or partial wind-up when a plan specifically permits surplus distribution, surplus can be distributed with the consent of active and inactive members. However, whenever a plan gives clear entitlement of surplus to the employer, then no consent should be required for a reversion of surplus to the employer. In addition, when consent is required, we prefer that the consent groups should be limited to two-thirds of the active group and two-thirds of all inactive members to avoid a situation where a small group of former employees could dictate the fate of a consent agreement. In addition, the superintendent should have some discretion to vary the size of a consent group in special circumstances. Tests for Solvency We agree with your comments that this is a very complex area but we do not have specific proposals at this time. The CIA would welcome the opportunity to work with the Manitoba Pension Commission to help develop appropriate solvency tests. 8

12 Submission March 2004 SUBMISSION SUBMISSION BY THE CANADIAN INSTITUTE OF ACTUARIES TO THE PENSION COMMISSION OF MANITOBA COMMENTS ON THE PENSION BENEFITS ACT OF MANITOBA REFORMS MARCH Canadian Institute of Actuaries Document Ce document est disponible en français Canadian Institute of Actuaries Institut Canadien des Actuaires 1 1

13 Submission March 2004 Comments by the Canadian Institute of Actuaries on the Proposals for Amendments to the Pension Benefits Act of Manitoba Table of Contents INTRODUCTION... 3 PURPOSE OF THE SUBMISSION... 3 SECTION I... 4 GENERAL COMMENTS... 4 SECTION II... 4 EXPANSION OF PROVISION OF INFORMATION AND INSPECTION... 4 PENSION PLAN ELIGIBILITY AND MEMBERSHIP... 4 ANCILLARY BENEFITS... 5 VESTING... 5 ENTITLEMENT TO PENSION BENEFIT... 5 PORTABILITY OF BENEFITS... 5 SHORTENED LIFE EXPECTANCY... 5 UNLOCKING FOR NON-RESIDENTS... 6 PENSION COMMITTEE... 6 DIVISION OF PENSION BENEFITS... 6 SURPLUS

14 Submission March 2004 Comments by the Canadian Institute of Actuaries on the Proposals for Amendments to the Pension Benefits Act of Manitoba Introduction The Canadian Institute of Actuaries (CIA) is pleased to submit its comments on the Pension Commission of Manitoba s recommendations for amendments to the Pension Benefits Act of Manitoba. The CIA has more than 2,000 members across Canada. Many of these members work in the pension plan area and are involved in the design, administration and funding of pension plans by working with plan sponsors, unions and trustees to design, finance and administer their pension plans. They have played a major role in the creation of pension plans and government income security programs, and in establishing the funding required to ensure the viability of these plans and programs. One of the CIA s goals is to assist legislators in developing pension plan legislation that efficiently meets the needs of all parties. Through its relations with government officials, the CIA tries to promote legislative intervention conducive to the effective and efficient management of pension plans, while best meeting the interests of all parties involved in the pension program. Purpose of the Submission This submission is a result of a review of the report issued in October 2003 by the Minister of Labour and Immigration of Manitoba, and titled The Pension Benefits Act of Manitoba Reforms. The October 2003 report is very similar to the consultation paper released in December 2002 by the Pension Commission of Manitoba, and titled Proposals for Amendments to the Pension Benefits Act of Manitoba. On January 31, 2003, the CIA did submit a response to the December 2002 consultation paper. This document will not repeat all of our earlier comments, but will provide additional commentary only where deemed appropriate and where the October 2003 report differs substantially from the December 2002 paper. Our January 31, 2003 response should be considered as forming an integral part of this document and is attached for your convenience. 3

15 Submission March 2004 Section I General Comments Since the mid to late 1980 s the pension legislation in Canada, though initially converging, has diverged somewhat in some areas. Uniformity is what multi-jurisdictional pension sponsors demand and that is what the CIA supports. The CIA has always advocated greater uniformity in the applicable pension legislation in the various Canadian jurisdictions. We greatly support the recommendations contained in the October 2003 report (e.g., 60% joint and survivor pension) that would immediately promote inter-provincial uniformity. We strongly encourage that the legislation changes adopted by Manitoba be consistent with the model pension law ultimately adopted by the Canadian Association of Pension Supervisory Authorities (CAPSA)*. For this reason, except for amendments that would promote inter-provincial uniformity based on current highly prevalent standards in Canada, we urge Manitoba to defer adoption of amendments to its pension legislation until uniform provisions are agreed upon through the CAPSA model law process. This is particularly important for changes dealing with benefit standards and member disclosure requirements. * Please note that the CIA is currently reviewing the consultation paper recently issued by CAPSA and titled Proposed Regulatory Principles for a Model Pension Law, and will most likely suggest revisions to certain proposed principles. Even though we generally support appropriate disclosure and accountability, we are concerned that some proposed amendments contained in the October 2003 report may unduly complicate the administration and communication of pension plans. The need for enhanced disclosure should always be balanced against the risk of creating unwarranted administrative complexities. Section II Expansion of Provision of Information and Inspection Instead of requiring the annual benefit statement to include the list of all of the documents and information available for inspection (this list would be space consuming and would not change from year to year), the legislation should allow the annual benefit statement to include a general statement that indicates members have a right to review and receive copies of certain documents and that they should contact the administrator for more details. Another alternative would be to require the list to be included in the summary of plan provisions. Pension Plan Eligibility and Membership With respect to the acceptable classes of employees, we would emphasize uniformity of legislation across Canadian jurisdictions as a critical goal. 4

16 Submission March 2004 Ancillary Benefits We are glad to see that your recommendation does not prevent a plan sponsor or trustee from providing a benefit solely for the benefit of a member or a class of members, provided those special provisions are documented explicitly by way of a plan amendment and appropriately funded. Vesting The full and immediate vesting recommendation is not consistent with current highly prevalent standards in Canada. However, it is consistent with the proposed regulatory principles of the CAPSA model law. We urge Manitoba to defer adoption of such an amendment to its pension legislation until uniform provisions are agreed upon through the CAPSA model law process. Entitlement to Pension Benefit The recommendation for members who continue employment after normal retirement age to be provided a pension that is the greater of: 1. the pension provided by continued accrual of pension benefits and 2. the actuarially increased normal retirement pension is difficult for members to understand, adds an administrative complexity, and is inconsistent with the proposed regulatory principles of the CAPSA model law. Portability of Benefits We note that the recommendation says the member with defined benefits should only be entitled to transfer the commuted value if not entitled to an immediate pension. We understand that this would not prevent the plan from offering portability to members over the earliest age that a pension could commence, in the situation where the plan sponsor wishes to provide more portability entitlements than those required by the legislation. This should be made clear. Shortened Life Expectancy We appreciate the fact that the recommendation permits, but does not require, a pension plan or a prescribed retirement benefit plan to offer a lump sum payment to an individual only by reason of a terminal illness or physical disability that reduces life expectancy to less than 2 years. We suggest that the regulations provide for the calculation of commuted values in these situations in accordance with CIA standards of practice which were developed to accommodate similar provisions in Ontario, and we strongly suggest that the criteria for establishing shortened life expectancy in Manitoba should be the same as the criteria ultimately adopted through the model law process. 5

17 Submission March 2004 Unlocking for Non-Residents We support the concept that the unlocking option for non-residents not be forced to be offered by a pension plan, but rather be at the plan sponsor s discretion. We would not support any proposals that would require offering such option where the payment of the pension has already commenced. Pension Committee A pension plan can ultimately have only one administrator irrespective of whether it has members in more than one jurisdiction. For this reason, we urge Manitoba to defer adoption of such an amendment to its pension legislation until uniform provisions are agreed upon through the CAPSA model law process. In a situation where a plan has members in more than one jurisdiction (e.g., Manitoba and Ontario), it is still not clear how the requirement to have a pension committee would apply in the absence of uniformity in legislation. If the requirement for an annual meeting of plan members is adopted, we feel that the deadline for holding the meeting should be extended to a later date like 10 months after the fiscal year end and that if 10% of the members request an annual meeting that it be held within the later of 10 months of the previous year end and 120 days of the request. Division of Pension Benefits Documenting the methods of splitting a pension after the pension has commenced will be very helpful. Surplus We note that the proposed regulatory principles of the CAPSA model law do not contain any provisions relating to partial wind-ups, and consequently do not force any distribution of surplus upon partial wind-up. When member consent is required for surplus distribution, we suggest that there only be two groups of persons from whom consent is required namely: i) the active members and ii) the inactive members and the beneficiaries who receive a pension (i.e., all persons with a unconditional entitlement to a pension and who are not currently accruing a pension). 6