Financing actuarial deficits creates better plan management

The use of reserve funds to cover up to 100% of the amortization payments required to finance an actuarial deficit in Quebec municipal and university sector defined benefit pension plans would allow for much better management of financial risks and would be potentially beneficial for everyone (sponsors, active members, and retirees), says the Association of Canadian Pension Management (ACPM)

In its comments on the initiative, which aims, among other things, to harmonize certain legislative provisions applicable to pension plans in the municipal, university, and private sectors, it says this provision was removed from the draft regulation after the consultation period.

Maintaining the limit of 50% of amortization payments financed from the reserve will mean that once the prior component is well funded, plan sponsors will probably want to eliminate investment risks as much as possible to avoid any future deficit, which will also significantly reduce the potential for gains that could lead to the improvement of benefits.

It says it understands that this provision was not changed due to lack of consensus. However, if there were flexibility to fund up to 100% of the amortization payments from the reserve, then those who do not want to increase the 50% limit could maintain the current provisions.

“Considering that the reserve is only composed of technical gains and not of additional contributions, if one wanted to better protect the rights of members, this flexibility could be permitted only after reaching a minimum funding threshold (for example, when the reserve reaches the threshold of the provision for adverse deviations, or any other minimum financial threshold deemed sufficient),” it says.

It recommends that the draft regulation be amended to provide this flexibility.