Pension regulator warns plans to make sure benefits are affordable

by Scott Blythe

(May 21, 2003) Acknowledging the devastation falling stock markets have wreaked on many employee pension plans, Canada's top financial regulator says that plan sponsors and members must ensure they can pay for pension improvements, and he also feels the federal superintendent should have the power to roll back unaffordable enhancements.

"As a pension regulator, I can't wave a wand and reverse the decline in the equity markets, or fix problems in some sectors that have led some sponsoring companies to experience problems, making it difficult for them to fund plans," superintendent of financials institutions Nick Le Pan told a breakfast meeting at the National Press Club in Ottawa this morning.

Thanks to underfunding, just over 15% of the 370 defined pension plans the Office of the Superintendent of Financial Institutions (OSFI) oversees are "on watch."

Le Pan cautioned the audience about the limits to regulation. "We cannot guaranteed that benefits will be met in all cases, " he said. "Employers and employees establish pension plans voluntarily. They set benefit levels and promise to fund them accordingly."

Instead, he said, regulators can help ensure that pension funds are kept in separate accounts, are invested prudently and disclose their financial status appropriately.

However, "there is no silver bullet for dealing with shortfalls," he added. Underfunded plans have two options: to erase a deficit over time with higher funding or to pare back plan provisions.

Unaffordable enhancements
"Looking back," he said, "it is clear that plan sponsors unions and others have to be very careful about enhancing benefits unless they are sure they can pay for them." Le Pan reminded his audience that OSFI had pushed for legislation 1998 to allow it to "void enhancements to pensions if the pension fund could not afford them." However, OSFI still needs a regulation passed to permit it to roll back enhancements, and Le Pan argued that the time has come for OSFI to have that power.

He also urged boards of directors to pay more attention to the pension plans their companies sponsor, just as plan members should not hesitate to obtain information from their administrators.

For its part, OSFI's annual "stress-testing" of plans — modelling the impact of changes in variables such as investment returns and interest rates — "has paid off in helping us to identify problem plans earlier." OSFI now plans to conduct stress tests every six months.

"The environment forces us to be much more activist and interventionist," he said. Stress-testing to date yielded a list of 177 pension plans that were not fully funded. Of those, 12 were taking pension holidays; OSFI asked them to resume making contributions immediately. It also asked the plan administrator to inform plan members of the current financial status of their pension plan.

Greater accountability
OSFI will give plans less leeway in judging their financial status. "We are not here to damage businesses or to hamper the proper development of companies that are creating and sustaining jobs," LePan said, especially since pension plans are voluntary arrangements. "But I think that, on balance, some change in tolerance is called for."

That means that plans will have to give OSFI advance notice of any intention to take a contribution holiday, and those intentions will have to be communicated to plan members. Also, for plans that "just under the wire," OSFI will require a board resolution to continue a contribution holiday, so that board awareness and accountability is increased.

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