Final Report of the Alberta and British Columbia Joint Expert Panel on Pension Standards. BC Pension Forum December 4, 2008

Transcription

1 Final Report of the Alberta and British Columbia Joint Expert Panel on Pension Standards BC Pension Forum December 4, 2008 Scott Sweatman, Associate Counsel Blake, Cassels & Graydon LLP 595 Burrard Street, Suite 2600, Three Bentall Centre Vancouver BC V7X 1L3 T: F:

2 Overview 1. Focus of Mandate/Panel Process 2. What Panel Heard 3. Objectives of Legislation 4. Governance Standards 5. DB Funding Rules 6. The ABC Plan 7. Next Steps

3 Focus of Mandate [Section 1] Full and independent public review of pension standards in the two provinces Make practical, affordable and feasible recommendations Consider: role of pensions in attraction, retention and worker mobility benefit security minimum funding and surplus ownership

4 Focus of Mandate (cont d) Consider (cont d): investment standards disclosure to members principles-based vs. rules-based legislation other jurisdiction approaches harmonization of standards governance need for new pension models

5 Panel Process [Section 1] Discussion paper in December 2007, A Better Pension System for the Future: Finding the Balance, covered broad policy and specific regulatory matters asking 39 questions Received 118 submissions from variety of stakeholders Met with over 40 stakeholders (some more than once)

6 Panel Process (cont d) Met with Ontario Commission and Nova Scotia Panel Reviewed research papers from Ontario Commission and other literature

7 Panel s Guiding Principles and Objectives of Pension Standards [Section 3] Recommendations in Report are a culmination of combined knowledge of Panel, research and the input received from stakeholders Resulting in the establishment of guiding principles in finding a balance and in keeping with Panel s views of the objectives of the pension system are as a whole Some principles and objectives are inherently at odds with each other (see pages of the Report)

8 What Panel Heard [Section 4] Objectives of legislation should be to increase coverage overwhelming view Mandatory or voluntary system close split Need for financial literacy education One size does not fit all different rules for different plans A more principles-based statutory framework Financing the system combination of user-pay and tax payer funded Inter-provincial and national harmonization

9 What Panel Heard (cont d) Funding standards (ITA limits, solvency funding elimination or retention, consider health of plan sponsor, considerations of matching assets/liabilities, require provisions for adverse deviation (PfADs) and/or target solvency margins Ownership and use of surplus all over the map from deferred wage arguments, he who bears the risk should reap the rewards, override of trust/common law

10 What Panel Heard (cont d) Pension solvency funds separate account from which sponsors could withdraw surplus without member consent Letters of credit to fund solvency deficiencies wide support Investment rules remove quantitative limits but retain (expand) prudent person principles

11 What Panel Heard (cont d) Environmental, social and governance (ESG) considerations should be allowed in making investment decisions Governance standards preference for principles-based best practices guidelines into legislation Fiduciary protection support for legislated safe harbour rules

12 What Panel Heard (cont d) Disclosure more is better Alternatives to traditional DB plans need for flexibility in legislation to accommodate innovation Phased retirement general support Unlocking various opinions Pension benefits guarantee fund general disapproval

13 Objectives of Legislation [Section 6] Primary objectives [6.1-D]: facilitating coverage by reducing barriers causing sponsors who are unwilling/unable to establish/maintain pension plan streamline minimum standards providing maximum flexibility, simplicity and clarity avoid over-regulation ensure pension promises are kept

14 Objectives of Legislation (cont d) Adopt principles wherever possible, supported by rules where necessary [6.2-A] principles of general application regardless of plan type (eligibility, vesting, locking-in, portability, segregation of assets, governance, defining the deal ) [6.3-A] different rules applicable to different plan types [6.3-B] Regulatory policies/guidelines should be developed to assist sponsors, administrators and members on compliance with principles-based standards [6.2-C]

15 Role of the Regulator Administer/enforce compliance, not actively promote pension coverage [6.4-A] Focus on risk-based monitoring with sufficient discretion and resources to approve new plan designs and governance structures [6.4-B-C] Develop administrative policies (guidelines on collaborative basis with pension community) [6.4-F] Grant regulator power to impose administrative penalties for compliance failures [6.4.1-A]

16 Checks and Balances Establish an independent joint expert administrative tribunal to hear appeals from superintendents decisions (Joint Pension Tribunal) with strong privative clause [6.4.1-C, A] Establish joint pension advisory council to provide broad input (insight to the ministers responsible for pension standards in the two provinces and the regulators (Joint Pension Advisory Council) [6.4.1-D, A]

17 Harmonization Identical statutes in both provinces [6.5-A] Rule of final location should be confirmed in both provinces [6.5-C] Establish a joint pension regulator to administer/enforce on consistent basis recommended harmonized pension standards [6.5-D]

18 Governance Standards Incorporate the principles contained in CAPSA s governance guidelines as a schedule to the legislation [7.1-A] Every plan to have a governance policy [7.1-B] includes a funding policy (for DB and TB plans) and a SIPP not to be filed but available

19 Governance Standards (cont d) Trustee/fiduciary education [7.1.1] administrators and trustees to have and use the knowledge and skills required to fulfill their obligations individuals with statutory fiduciary responsibility for pension plans to obtain certification from suitable training programs within a suitable period after their appointment develop educational programs to train individuals with statutory fiduciary responsibility and offer at the post-secondary level in both provinces

20 Governance Standards (cont d) Disclosure to members [7.1.2] pension plan administrators to disclose to members key information in accordance with detailed disclosure rules the disclosure rules to be tailored to different plan types electronic methods of disclosure to be explicitly permitted administrators to be required to notify members, in their annual statement, that the plan has a governance policy

21 Investment Rules [7.2] AB and BC investment standards to be uncoupled from the federal Schedule III remove quantitative restrictions on investment increase reliance on the prudent investor principle Keep conflicts of interest (related-party rules) and integrate into provincial legislation Expand existing prudent person rule to incorporate a requirement for expertise

22 Fiduciary Protection [7.3] Elements of the CAP Guidelines that do not relate to investment choice to be legislated to apply equally to all plans, including those that do not offer member investment choice Auto-enrolment and auto-escalation to be explicitly permitted not actionable in and of themselves

23 Fiduciary Protection (cont d) Provision of one investment vehicle only not, in itself, to be actionable (unless selection has not been made and monitored with due diligence) Plan fiduciaries who can demonstrate they are compliant with the requirements of a pension judgment rule in the legislation to have a statutory defence against claims in respect of their decisions in the same manner that corporate directors are protected by the business judgment rule

24 DB Funding Rules Continue to require both solvency and going-concern valuations [8.1.1-A] Current going-concern funding rules continue to apply [8.1.1-B]

25 DB Funding Rules Solvency [8.1.1-C] Asset valuations on pure market (no smoothing) Liability valuations prepared on a pure wind-up basis assuming annuity purchases for persons receiving or eligible for immediate pensions termination (commuted) value otherwise benefits provided at the discretion of the administrator/trustee/plan sponsor not included in the valuation

26 DB Funding Rules Solvency [8.1.1-C] Assumptions based on commuted value standards (to be adopted in the legislation) Amortization of any solvency deficiency over 5 years assets to satisfy the deficiency could include letters of credit or assets in a PSF Solvency valuations required annually unless, at any valuation, plan solvency was 110 percent or greater, then three years

27 Ownership and Use of Surplus [8.1.2] The establishment of a pension security fund (PSF) to be permitted Letters of credit continue to be permitted Contribution holidays in relation to, and surplus withdrawals from, the regular pension fund to be permitted subject to 5% cushion required (including any PSF) updated financial condition excess over 5% to be spread over 5 years

28 Legacy Surplus Issues [8.1.2-D] Permit ring-fencing New wrap-around plan subject to contract law no need to wind up legacy plan

29 Utilization of Plan Assets [8.1.3] Adopt principles of ownership in the legislation Include in the legislation rules on partial plan terminations plan mergers and divisions plan expenses re-opening closed plans DB/DC contribution holidays

30 SCTB Funding Single funding test going-concern plus [8.2.1] best estimates appropriate PfAD get CIA to develop standards stress tested remediation plan regular, consistent and timely

31 SCTB-Related Rules Benefit improvements [8.2.2] only permitted if target ratio (>100%) maintained allow temporary benefits Valuations [8.2.3] triennial or more frequent per regulator allow for wind-up if probability higher show target ratio and explicit PfAD show settlement ratio

32 SCTB-Related Rules (cont d) Wind-up asset allocation [8.2.4] trustee determined proportions Transfer values [8.2.5] going-concern assumptions pro-rated by funded ratio (max. 100%) no catch-up

33 SCTB Governance [8.2.6] Governing fiduciary to certify compliance with policies Annual assessment Funding policy include policy on benefit increases actuary to opine re not inconsistent with sound actuarial practice Education and training both fiduciaries and administrators Member disclosure include settlement ratio and explanation

34 Locking In [9.1] Unlocking optional for Plans If silent, default is 50% at 50 or over SCTBs to continue to be able to set rules re termination If Plan permits and over 50, one time 25% or 50% unlocking on termination No change to existing rule within 10 years of retirement No change to other exceptions allowing unlocking (add financial hardship in BC) Transition rules in Alberta

35 Income Tax Rules [10.1] Governments to actively advocate changes max. contribution and benefit levels max. funding limits to 25% anything necessary to allow PSF update max. transfer values for DB to DC add flexibility to allow new plan designs allow contributions from self-employed and employees whose employer chooses not to contribute

36 Financial Education [10.5] Build and expand existing programs Explore earlier introduction Ensure teachers are properly equipped Develop a clear mandate within government financial literacy campaigns adult education

37 The ABC Plan [Section 11] One plan for our two provinces Based on simple DC formula (generally with matching employer and employee contribution rates) Design should provide the benefits to employers of DC cost security but include DB-like management and bestin-class professional management, scale, investment expertise and very strong governance Total management expense ratios and administration costs should not exceed 50 bps

38 The ABC Plan (cont d) All employers and workers, including self-employed earning income in either province eligible to participate Auto-enrollment with employer and employee opt-out Self-employed can opt in No investment choice Arm s length from government

39 Recommended Next Steps [Section 12] Stakeholders to provide feedback on Report by March 2, 2009 via Governments to enter into discussions with: federal government regarding tax and bankruptcy law changes CIA regarding proposed funding rules CICA regarding impact of IFRS rules on pension plan education ministries to develop financial literacy programs and trustee accreditation

40 Recommended Next Steps (cont.) Governments appoint: initial JPAC to advise governments/assist in developing new legislation Steering Committee to develop governance and design structures for ABC Plan Governments take a leadership role on pension issues in Canada

41 Q & A

42 Final Report of the Alberta and British Columbia Joint Expert Panel on Pension Standards BC Pension Forum December 4, 2008 Scott Sweatman, Associate Counsel Blake, Cassels & Graydon LLP 595 Burrard Street, Suite 2600, Three Bentall Centre Vancouver BC V7X 1L3 T: F: