Mr. Chairman and members of the committee, on behalf of the Canadian Institute of Actuaries I'd like to thank you for the opportunity to appear and to provide input to this year's pre-budget hearings.
Too few Canadians are saving too little to generate adequate retirement income. Your committee invited feedback on the tax system needed for Canada to ensure a prosperous future. In our view, a healthy private pension system is a crucial component of such a future. The tax system is instrumental in facilitating and encouraging retirement savings, and most importantly company pension plans.
In particular, I am here to talk about defined benefit pension plans. These have seen significant decline in the past decade or more, and we strongly believe that saving and improving them is essential for millions of Canadians. Allowing their continued erosion weakens the whole pension system.
Before picking up on the tax-focused recommendations included in our written submission, who are actuaries and why are they interested? Actuaries are business professionals who are trained to analyze the financial consequences of risk. Much of our work involves the design and pricing of insurance, pension, health, and other benefit programs along with the modelling, measurement, and management of financial risk. In serving the public interest, Canada's actuaries have a history of contributing to key public policies.
The future of defined benefit pension plans is at risk. Committee members have no doubt seen news reports that a growing number of companies are converting their defined benefit plans to defined contribution plans. From a public policy perspective this is most unfortunate, given that defined benefit plans provide some certainty to plan members' retirement incomes. A move to defined contribution plans creates uncertainty and makes the plan member responsible for the investment risk and increasing longevity risk. Individual Canadians then face the very real risk that their retirement incomes will run out before they do.
A number of issues have contributed to the shift away from defined benefit plans. For example, court decisions and regulatory changes around surplus ownership have created unanticipated costs and uncertainties for pension plan sponsors.
Funding a pension plan is essentially a very long-term exercise. Short-term fluctuations can be quite significant--witness the recent declines in equity returns that have turned around in just the past 12 months. The long term is much more predictable; however, tax rules that take a very short-term view and limit the buildup of surplus have been a contributing factor to recent deficits and plan sponsor uncertainty. They have limited the ability of plans to maintain consistent contribution levels by using surpluses in good investment years to fund shortfalls in bad investment years.
The institute has designed a 10-point prescription for Canada's ailing pension system, a copy of which is attached to our submission. Three of the points call for changes to tax legislation that would help secure benefits and reduce uncertainty in the defined benefit field.
We believe higher levels of pension plan funding are required to improve the security of member benefits. A target solvency margin that recognizes the volatility of pension plans and their assets would establish a risk-based approach to plan funding contributions.
We recommend that a task force be set up with representation from pension regulators, the Department of Finance, and the institute to review the research and establish a target solvency margin framework. We also recommend that the Income Tax Act and regulations be amended to facilitate the concept of a target solvency margin and permit contributions to fund pension plans up to this higher level.
We believe many plan sponsors would be willing to fund defined benefit plans more securely if they knew they could access surpluses that might arise from their excess contributions. A pension security trust is an innovative way to facilitate this improvement and the concept of the target solvency margin.
Basically, it's a side fund owned and funded by the plan sponsor. Solvency deficiency and other payments beyond normal contributions would be placed in the pension security trust. If subsequent valuations showed that some of the assets in the pension security trust were not required, the excess funds could be released back to the plan sponsor.
So we recommend the establishment of a tax-deductible pension security trust under the Income Tax Act and regulations in order to facilitate these pension contributions.
We believe, considering the volatility in pension returns, the current level of allowed surplus in pension plans is too low. Currently plan sponsor contributions must be suspended when the surplus reaches 10% of actuarial liabilities. We therefore recommend the Income Tax Act and regulations be changed to permit a higher surplus before plan sponsor contributions must be suspended.
In summary, Canada's actuaries are convinced that the loss of defined benefit pension plans ultimately hurts working Canadians.
Thank you for your time.