CME: Reforms to defined benefit pension plans a major improvement

Toronto, May 19, 2017

Canadian Manufacturers & Exporters (CME) applauds the steps taken today by the Ontario government to address long-standing concerns over the funding model for defined benefit pension plans. The new funding model developed by Ontario provides a balanced and effective solution to sustaining costly defined benefit plans in the long run and in an intensifying global competitive environment.

“Today’s announcement is a positive development that will go a long way in preserving single employer DB plans, in enhancing competitiveness for Ontario companies and in preserving jobs,” said Ian Howcroft, Vice-President of CME’s Ontario division. “It will level the playing field with the U.S. that doesn’t have solvency requirements and Quebec that eliminated solvency funding altogether.”

The outlined proposal permits the use of realistic long term assumptions which should facilitate more stable and orderly funding, without altering the benefit payments to the employees and retirees, and without impacting the security of the benefits. This underscores the basic principle that a viable pension plan requires a viable plan sponsor. The solvency rules, under the current system, were out-of-date as they were tied to spot market risk-free interest rates and annuity rates. When rates are at all time lows, liabilities are at all time highs and that translated into excessive and volatile contributions.

The proposed framework also requires the employer to provide further protection for the members of the plan by contributing additional funds to a reserve, even if the plan is fully funded on a “going concern” basis. This will help plans withstand financial shocks or short term market volatility.

“I applaud the Premier and the Finance Minister’s leadership in acting decisively to modernize Ontario’s pension funding framework, in a responsible manner by also tightening the going-concern approach with appropriate suspenders combined with increased Pension Benefit Guarantee Fund (PBGF) protection” stated Howcroft.

CME is also pleased to see that the Minister will be considering alternate approaches to support pensioners if a plan sponsor goes into bankruptcy even though it is a very low frequency event. There are, and we have, proposed innovative solutions that would permit plan members to realize much better economic outcomes in these scenarios and look forward to working with the government and all the stakeholders to study these options more closely