March 9, 2016 by Canadian Underwriter
The Ontario government has “initiated a review” of the solvency funding framework for workplace pension plans, the ruling Liberals announced in their budget document for 2016-17.
“In recent years, low long-term interest rates have placed funding pressures on pension plan sponsors of single-employer defined benefit (DB) pension plans,” the government stated Feb. 25 when it released its 2017-17 budget. “To assist sponsors in these challenging circumstances, the government has initiated a review of the current solvency funding framework.”
In that document, the Liberals state they are “committed to ensuring that the Pension Benefits Guarantee Fund (PBFG) remains a sustainable source of protection for covered plans.”
PBGF “was set up in 1980 by [then] Premier Bill Davis to be self-financing, but it has been far from that, unfortunately, for a long time now,” said Julia Munro, Progressive Conservative MPP for York-Simcoe, during a debate in early 2014 on a private member’s bill that died on the order paper.
PBGF “simply was not designed for today’s economic realities and gives a false sense of security to Ontario’s private pensioners and their employers,” Munro said at the time. “Without government bailouts, the fund would be defunct.”
In February 2012, the Commission on the Reform of Ontario’s Public Services (chaired by Don Drummond) recommended that the government either terminate PBGF or “see if it can be transferred to a private insurer.” In the Drummond Report, the commission contended PBGF could present “a large fiscal risk” for the province.
“On several occasions over the last 30 years, there has not been enough cash in the Fund to cover large anticipated PBGF claims,” the commission wrote in 2012 of PBGF. “In those instances, several loans were made from the Consolidated Revenue Fund to cover claims. The only loan amount still outstanding is $242 million of a $330 million loan made in 2004 to cover a significant claim. In 2010, the government made a $500 million grant to the PBGF to initiate the PBGF reform process and stabilize the Fund in the near term. In May 2011, $384 million was paid out of the Fund in partial settlement of another significant claim.”
The commission added at the time that the risk to PBGF “is not spread according to insurance principles.”
Since 1980, PBGF had collected $1 billion in premium and paid out $1.4 billion in claims, Auditor General Bonnie Lysyk noted in her 2014 report, released Dec. 9 of that year. Since 1980 “the PBGF has required loans and a grant from the Ontario government totalling $855 million to cover all eligible claims,” she added.
“As of December 31, 2013, 92% of Ontario’s defined-benefit plans were underfunded, compared to 74% as of December 31, 2005,” she wrote. “Over the same eight-year period, the total amount of underfunding of these plans grew from $22 billion to $75 billion.”
In its budget document for 2016-17, the government said it has appointed David Marshall, former president and chief executive officer of the Workplace Safety Insurance Board, to lead the review of pension solvency funding.
In October, 2015, the province announced that Marshall was appointed as an advisor to Finance Minister Charles Sousa. Marshall is also tasked with providing recommendation on reducing auto insurance costs.
Marshall “will provide advice and recommendations” to Sousa, “with a view to assisting the Ministry of Finance in developing a balanced set of solvency funding reforms that would focus on plan sustainability, affordability and benefit security,” the province stated in its budget document Feb. 25.
In 2008, there was a cumulative $6.6-billion solvency deficiency for 2,258 pension plans covered by PBGF, the Auditor General noted in her 2014 report.
“As of March 31, 2014, this cumulative solvency deficiency had increased by more than 400%, to almost $28.9 billion, covering only 1,834 plans, 19% fewer than in 2008.”
The Financial Services Commission of Ontario “has limited powers under the Pension Benefits Act (Act) to deal with administrators of severely underfunded plans, or those who do not administer plans in compliance with the Act,” Lysyk wrote in her 2014 report. “FSCO can only prosecute an administrator or must order a plan to terminate before it can then appoint or act as the administrator. In addition, FSCO cannot impose fines on those who fail to file information returns on time.”
She noted in her 2014 report that PBGF “has no legal obligation to pay claims in excess of its available assets.”