DB regulations a bad fit for target-benefit plans, MEPPs: report
Canada’s pension regulations have been designed to govern defined benefit plans and are a bad fit for target-benefit and multi-employer pension plans, according to a new report by the C.D. Howe Institute.
The report, authored by Barry Gros, a retired actuary and chair of the University of British Columbia staff pension plan, argued that the regulation of these plans should reflect the pension promise they make to members, which is different than traditional DB plans. It said regulators should take a principles-based approach to financing standards that focuses on these plans’ long-term sustainability, rather than focusing on generic funding requirements.
Principles-based regulations focus on targeted outcomes and are written with the objective of being simpler and easier to comply with, which Gros argued allows for innovation and for regulators to keep up with ongoing improvements to industry best practices.
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“Because target-benefit plans and multi-employer pension plans are different than defined benefit plans, they need their own policy and pension standards that are focused on clear outcomes,” said Gros, in a press release. “Principles-based regulation allows plan sponsors to focus on the risks inherent in their plan rather than having to comply with generic rules that attempt to work on a universal basis.”
The principles that could guide policy-makers, according to Gross, include putting plan members and their benefits at the heart of all decision-making, considering long-term sustainability of the targeted benefits as the primary objective of plan management and taking remedial action in a reasonable time frame after sustainability tests fail.
The report also noted that target-benefit plans and MEPPs are different from DB plans in a few key ways: they’re typically managed by boards of trustees with significant member representation, rather than by a single employer; they don’t offer the same benefit guarantee as a DB; and a statutory actuarial valuation isn’t a financial management tool for these plans as it is for traditional DB plans.
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These plans “seem to have been caught up in the move away from solvency funding for traditional DB plans with the imposition of going-concern plus funding rules without any recognition of plan-specific objectives and risk-management processes in place,” wrote Gros.
While provisions for adverse deviation have a clear impact on DB plans — since more contributions are required of the plan sponsor — it can have disruptive implications for target-benefit plans and MEPPs, he noted. As funding levels for these plans are typically fixed rather than driven by actuarial valuation results and contributions are set through negotiations, a PfAD wouldn’t add extra dollars into the plan.
A PfAD also doesn’t increase benefit security the way it serves to in a DB plan, said Gros, because it only operates to reduce future benefit accruals expected otherwise under the pension plan’s terms. In the event that regulations require redirecting fixed contributions to fund a past service deficit, benefits for current members are effectively stolen to prop up past members’ benefits, enhancing intergenerational inequity.
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Gros suggested that policy-makers focus on three factors to strengthen the plan governance of target-benefit plans and MEPPs, which would in turn improve their sustainability: organizational coherence regarding the plan’s sustainability goals, plan leadership and processes around risk budgets, sustainability philosophy and intergenerational equity.
He also suggested that MEPPs in particular appoint a wider variety of stakeholder representatives, such as retirees, to ensure greater transparency around the plan’s risk management, stronger plan administrator accountability and provide beneficiaries with a greater degree of influence over decisions being made on their behalf.
Regulators could also require target-benefit plans and MEPPs to have a communications policy, in addition to funding and governance policies, that would include identifying all key audiences, a statement of goals and objectives and measuring and managing the effectiveness of communications activities against their expected outcomes. “With there being a strong link between plan governance and member communication to sustainability, I recommend prescribing stronger governance requirements in these areas rather than relying on guidelines,” wrote Gros.
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