Employer’s pension plan

It’s critical to realize that the criteria established for pension valuation and funding have been developed over many years of experience.

However, as time goes on, some procedures become dated while other, more effective ones develop that improve the procedure as a whole. It might be argued that minimum funding should continue to take care of both solvency and going concern liabilities in this situation. There are numerous arguments that could be made in favor of the claim.

Such techniques that guarantee the pension fund’s strength and stability financially should be employed from the very beginning.

In the case of funding criteria, both the going concern and solvency liabilities. There are various reasons that could be presented to support the argument. At its very foundation, such methods that ensure the financial stability and strength of the pension fund should be adopted. In the case of funding criteria, both the going concern and solvency liabilities provide a reasonable basis to ensure the financial stability of the fund (Gold, 2005).

Again, one opposite view is that going concern valuation is quite conjectural in nature while the solvency valuation has reduced factor of speculation. This argument could be faced on the grounds that the conjectural nature of a funding mechanism does not constitute it as invalid until or unless such could be estimated with greater accuracy.

Furthermore, a combination of both the methods ensures that the pension fund has been supported and stabilized by all the relevant impacting factors. Another important reason why both the methods should be addressed rather than a single one is the fact that both the methods have their respective strengths and weaknesses.

A combination of the funding and valuation methods ensures that the weaknesses of one method are offset by the strengths of another method. There are reasons why only solvency funding should not be the focus of the minimum funding rules. In the past, a number of stakeholders were taken onboard to work out an efficient valuation and funding mechanism.

Among a number of suggestions provided by them one of the most important suggestions had been to allow relaxation to the stakeholders to be exempted from the funding method which appeared to be the source of their discomfort. It is interesting to note that in recent times, it has been the solvency funding which has been the main discomfort for the stakeholders. It is important that the opinions of stakeholders who are crucial to the effectiveness of the overall system must be obtained.

If only solvency method had been addressed by the minimum funding rules, this may not be comforting factors for the stakeholders who are prime components of the pension system.

It is therefore suggested that both going concern and solvency liabilities should be addressed by the minimum funding rules.

QUESTION 5(B)

It is suggested that the minimum funding rules should take into account the financial health of the employer sponsoring a DB plan. This is essential from multi-perspective. At first, the employer is one of the chief stakeholders of a pension plan. The capacity of the employer to pay its contributions is one of the most important aspects of the solvency of a pension plan. The financial viability of the employer becomes important.

At this stage, there are two different prospects to understand. At present, the minimum funding rules have same standards for all the types of companies irrespective of their financial health. This causes the companies of different nature to work under same standards.

To understand the point in detail, the current amortization period for funding solvency deficits is five years. This is irrespective of the financial health of a company. We should take into consideration two different types of companies in this regard. The first type of companies is financially strong companies while the second type of companies is financially weak companies (Munnell, 2006).

The first types of companies have a lower risk of an insolvent pension plan. This feature enables them the right to amortize their financial funding on a longer period as compared to the current amortization period of five years. The current regulations, therefore, could be termed as harsher on financial stronger companies who have less risk in terms of pension plan insolvency.

The second types of companies are not financially stronger. For them, the amortization period could be kept as it is as with them the risk of pension plan insolvency increases. This clearly implies that minimum funding should take into account the financial health of the company as taking it into consideration would further enhance the overall pension plan process and would also ensure its safety and stability.

With respect to the mechanism of taking into account the financial health of the employer, there are various methods available. One viable measure would be to use the services of a debt agency to analyze and report on the financial health of the employer. This way the objective would be achieved by a third party rather than one of the stakeholders.

Another method to use is the governmental rankings, stock market rankings, and report of the external auditor firm with respect to the financial health of the employer.

Should MEPPs be subject to solvency valuations?

It is suggested that MEPPs should only be subject to solvency valuation for informational purposes rather than for funding. For the objective of funding, they should only be valued, on, going concern basis.

There are various reasons for such a proposition. The sponsor contribution in the case of MEPPs is generally fixed by means of collective bargaining. It does not involve the role of an actuarial estimate. This provides MEPPs a reason to avoid funding on the basis of solvency valuation.

Another reason is that MEPPs are generally sponsored by more than one sponsors, i.e. a number of enterprises collectively participate in funding MEPPs. It could, therefore, be argued that the chances of a sponsor failure in case MEPPs are quite less if not completely impossible. The only condition of sponsorship failure is when all the sponsors fail at the same time which is generally a difficult scenario and may occur rarely (Béland & Myles, 2005).

The benefits in the case of MEPPs can easily be adjusted as a result of changing economic conditions. Taking into account all these factors it could be argued that MEPPs should only be subject to solvency valuation for informational purposes rather than for funding. For the objective of funding, they should only be valued on, going concern basis.

QUESTION 2

The pension adjustment (PA) amount is the value of the benefits an employee earned in the year under employer’s registered pension plans (RPP) and deferred profit sharing plans (DPSP), and possibly, some unregistered retirement plans or arrangements (Broadbent, et al, 2006).

The Pension adjustment reversal, on the other hand, refers to the reversal of the previously assumed pension value (Broadbent, et al, 2006). This occurs when an employee leaves a company after a very short period before being vested. For vested employees a PAR is calculated in the following way: Total PAs – Commuted Value = PAR.

It is first important to understand the objective behind pre-funding. Pension plans are pre-funded so that they could address any deficit in future. The most important question is could such deficiency be calculated accurately. It is difficult to assume that future liabilities could be calculated with an exact approximation.

Whether the plan sponsor is a private or public sector employer, the foundational notion remains the same. It is more appropriate that estimation should be made for the present viability of the fund so that its strength could be utilized to gain strong footholds in the future. For this purpose, pension plans should not be pre-funded.

Where the following plans would be registered?

- A pension plan for VIA Rail

VIA Rail is a transportation company. According to the law Federal legislation applies for plans in certain federally regulated industries (e.g., transportation). As VIA rail also belongs to the transportation industry, the jurisdiction of registration is federal.

- A pension plan for an employer whose head office is in Winnipeg, but has 140 members working in Manitoba, 225 members working in Saskatchewan, and two members working in Alberta

The jurisdiction of the employer is Saskatchewan because that is where the majority of the employees are located.

- A pension plan for an employer whose head office is in Prince Edward Island and whose members all reside in Prince Edward Island

Assuming that the members are employees of the employer the jurisdiction of the company, therefore, becomes Prince Edward Island.

References

Béland, D., & Myles, J. (2005). 12. Stasis amidst change: Canadian pension reform in an age of retrenchment. Ageing and Pension Reform Around the World: Evidence from Eleven Countries, 252.

Broadbent, J., Palumbo, M., & Woodman, E. (2006). The shift from defined benefit to defined contribution pension plans-implications for asset allocation and risk management. Reserve Bank of Australia, Board of Governors of the Federal Reserve System and Bank of Canada, 1-54.

Gold, J. (2005). Accounting/actuarial bias enables equity investment by defined benefit pension plans. North American Actuarial Journal, 9(3), 1-21.

Munnell, A. H. (2006). Employer-sponsored plans: the shift from defined benefit to defined. The Oxford handbook of pensions and retirement income, 359.