Market mayhem from the COVID-19 crisis has badly damaged pensions’ funding levels, but a recent overhaul of Ontario regulations means many companies will likely have a holiday for several years from pumping more cash into them to make the needed repairs.
As businesses across Canada rush to ask for relief from a wide range of regulations and funding requirements, some companies with looming pension problems may also ask for relief from making their regular, required funding contributions.
Ontario, however, has already offered its help. The provincial government made the changes in 2018 to pension funding rules, which previously required pension plans to have a solvency ratio of 100 per cent, or else make extra payments to push their pensions back to that level. That meant pension plans had to have assets equal to the estimated long-term liability for providing pensions to members.
The 2018 changes dropped that minimum funding ratio to 85 per cent. The change meant many more plans were deemed healthy and escaped the special payments. Ontario government data estimated that just 121 plans out of 1,364 had funding ratios below 80 per cent at that time.
It was a tradeoff in the last days of Kathleen Wynne’s government, given to companies to make them feel better about higher insurance premiums to fund the pension benefits guarantee fund, which pays a portion of unfunded pension benefits when an employer becomes insolvent. As part of the plan, the minimum guarantee for a pensioner went to $1,500 from $1,000 a month.
Michael Powell, president of the Canadian Federation of Pensioners, said his group estimated companies received a long-term benefit of $4-billion from the lowered funding ratio – money, he said, that could have been used to lift the cap and guarantee 100 per cent of pensions. “By what happened, you can see that they didn’t pay a lot of attention to us," he says.
After markets boomed in 2019, Ontario pensions were in even better shape. The Financial Service Regulatory Authority of Ontario estimated the median funding ratio at the end of 2019 was 99 per cent, with 48 per cent of plans more than 100-per-cent funded. But with the recent market carnage, that has changed – a lot.
Two consulting companies, Aon PLC and Mercer, a division of Marsh & McLennan Cos., say their measures of pension health suggest the typical Canadian plan’s funding, at recent market lows, dropped by anywhere from 10 to 25 percentage points. The average plan, they figure, swung from being at least 100-per-cent funded at the end of 2019 to ratios of 90 per cent or less. Those numbers improved with the markets last week, even despite Friday’s drop, but the typical plan is still underfunded.
“The fact that we have these changes that came into place in Ontario will be a saving grace for some pension plans,” says Jana Steele, a partner at Osler, Hoskin & Harcourt LLP who specializes in pension law. “Otherwise, they might have been in a much worse scenario, having to make special payments. Now they may not have to, given the changes.”
An underfunded plan has always been allowed to make up the difference over five years through gradual catch-up payments. And now, if a plan is considered underfunded, it only needs to develop a schedule to get back up to 85 per cent, not 100 per cent. For a plan with $100-million in assets, that’s a $15-million difference.
And pension plans don’t have to meet the standard every single year. A company with a well-funded pension only needs to file a valuation report once every three years. That means every company sponsoring a plan can look right now at its dreamy end-of-2019 funding numbers, file a report reflecting stock markets of yore, and be done until 2022. No extra funding requirements will apply.
Nathan LaPierre, a partner for retirement solutions at Aon, says plenty of companies did a valuation a year ago, using 2018 numbers, but now, seeing the market damage, they’ll race to file another one with the 2019 numbers. “They’ll choose to do the valuation with the date before the crisis, because that will lock in contributions that don’t take into account this significant downturn.”
FSRA, a new regulatory body launched in 2019, inherited this system. Spokeswoman Judy Pfeifer acknowledges companies may try to rely on the end-of-2019 numbers, but she says FSRA is actively monitoring plans’ health and sustainability.
If companies aren’t addressing pension risks adequately, she says, “FSRA will deploy regulatory tools and powers in a reasonable and proportionate way.”