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Benefits and Pensions MonitorMEPPs: To Solvency Fund Or Not? Unnecessary Reduction In Benefits The primary practical mechanism in these plans to deal with a solvency deficiency (assuming the insufficiency of the existing contribution rates and any contingency reserve) is a reduction in the benefits. In the current environment of low interest rates, benefits get reduced. Then, current interest rates rise and the benefits are reinstated and perhaps even increased. This is the volatility referred to above.
Clearly, the security of the benefits has been compromised. The regulators ʼ primary overall objective is benefit security, which in single- employer plans they hope to achieve through solvency funding. Ironically, in the case of MEPPs, solvency funding has exactly the reverse impact and the objective will not be achieved. Intergenerational Equity As discussed above, volatile solvency funding results in volatile benefit patterns. Volatile benefit patterns, in turn, result in the effective transfer of monies from one generation of members/ beneficiaries to another. For example, if the plan has to over-fund currently because of solvency funding requirements, current benefits will be set too low, unfairly resulting in the effective transfer of monies from the current generation to future generations. Focus On Long-term Best Interest MEPPsʼ funding focus and philosophy is normally on the long-term – as represented by a going-concern funding valuation – plan continuation scenario. Solvency funding would impose an immediate short-term (wind-up) focus, at the expense of the long-term best interest of the plan and its members. Stated a different way, ʻMembers prefer a 99.9 per cent probability of a higher benefit rather than a 100 per cent guarantee of a lower benefit.ʼ Who is the government – the politicians and the regulators – to tell them (all the major stakeholders – unions, employers, and trustees) otherwise? Clearly, the broader long-term best interest of the plan and its members must not be sacrificed for the narrow focus and short-term perspective of many regulators and, particularly, in respect of an event (plan wind-up) that is virtually never going to happen. As an analogy, the legislated speed limit on Highway 401 in Ontario is currently 100 kilometres/hour. Reducing it to 20 kilometres/ hour would clearly save lives, yet we donʼt impose that because itʼs deemed not to be worth it (the ʻcostʼ in terms of the ʻfewʼ lives lost). So solvency funding is not worth it (the ʻcostʼ in terms of membersʼ potential, but unlikely, loss of benefits). The difference, however, is that while reducing the speed limit to 20 kilometres/hour would save lives and clearly be a positive result from that perspective, imposing solvency funding on MEPPs clearly has a detrimental impact on the plan and its members. Unlikelihood Of Plan Wind-up While I do not consider the fact that MEPPs are highly unlikely to windup to be a primary reason to exempt MEPPs from solvency funding, it is certainly a reality that leads to the same conclusion. The fact of the matter is that, in Ontario for example, there have been only two wind-ups (with a relatively small number of members) of these types of plans in the last 50 years. Unlike the situation in respect of single-employer plans – whose future continuance is contingent on the continuing viability of a single employer – a MEPPʼs continuance is not dependent on the fortunes of any single employer, but rather on an entire industry (for example, construction). Therefore, there is not the same ʻneedʼ for solvency funding for MEPPs as there is for other (single-employer) plans. Furthermore, if an employer does withdraw, the affected members will typically move to another employer in the industry/plan. Legal Situation
The legal requirement to fund (or not to fund) solvency deficiencies varies by jurisdiction across Canada. Solvency funding is clearly required in B.C., Alberta (with a three-year moratorium), Saskatchewan, Manitoba, Quebec, Newfoundland, and the federal government. It is not required in Nova Scotia, New Brunswick, and PEI (no legislation). The U.S. has long recognized the differences between MEPPs and single-employer plans and has not imposed the solvency funding requirements applicable to single-employer plans on them. This position has recently been reaffirmed by its new Pension Protection Act. Meanwhile, in Ontario, the regulator, the Financial Services Commission of Ontario, would lead one to believe that solvency funding is legally required, the reality is that it is not, nor was it ever intended to be. After all, why are MEPPs not covered by the Pension Benefits Guarantee Fund? That was not an accident. Unfortunately, however, FSCOʼs interpretation of the law is to require solvency funding. Clarification is, therefore, necessary to clearly exempt MEPPs from solvency funding and avoid the continued debate. Currently, a joint task force of industry (MEBCO) and government (political, policy, and regulatory levels) personnel is working together to define a new funding framework for MEPPs. I am confident that this framework will not involve any form of solvency funding (although the planʼs wind-up position will still be calculated and disclosed, as it should be). It will, however, require strengthened member disclosure and communication, improved plan governance based on the Canadian Association of Pension Supervisory Authorities (CAPSA) model (including a formal funding policy), possible restrictions on plan improvements, and benefit reductions if, on the going-concern basis, the contributions are insufficient. Once Ontario clearly takes the position – and follows it up with legislative clarification – that solvency funding is not required for MEPPs, it is hoped that other jurisdictions in Canada and CAPSA will follow Ontarioʼs lead and provide an environment across Canada in which MEPPs can thrive and continue to benefit the Canadian economy. Solvency funding of MEPPs results in:
Not only does solvency funding not serve any useful purpose in the case of MEPPs, it actually does harm to the plan and its members. Solvency funding is clearly not in the best interest of the plan and its members, causing potentially unnecessary benefit reductions. Most importantly, it could very well drive the plan to the point of wind-up, which is exactly what solvency funding is designed to protect against in the case of single-employer plans! Finally, it is hoped that CAPSA will support this initiative and the legislators/ regulators of the various jurisdictions in Canada, based on a clear understanding of the situation and a clear recognition of the plansʼ/membersʼ best interest, will exempt MEPPs from solvency funding requirements and will make those changes as soon as possible. ■ H. Clare Pitcher is a principal and consulting actuary in the Toronto office of ACS/ Buck Consultants.
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Ultimately, the 
While the fundamental issue we have been dealing with is whether or not solvency funding should be required for MEPPs, the next question is whether or not it is required in the various jurisdictions across Canada. This is a 