Thank you.
I'd like to thank the committee for inviting the Pension Investment Association of Canada, or PIAC, to appear today. I'm Barbara Miazga. I'm the secretary-treasurer of the board of directors of PIAC.
PIAC has been a collective voice for Canadian pension funds for over 30 years now. PIAC is actively involved in advocacy on behalf of its members. An example of that would be the submission made in response to the financial sector division of the Department of Finance in response to the consultation paper on private pensions, dated March 13, 2008.
My remarks today will be centred on the highlights of that submission. Moving into the background, this committee study is on measures to enhance credit availability and the stability of the Canadian financial system. The relevance to PIAC is more towards the stability of the Canadian financial system. PIAC's position is that the stability of defined benefit pension plans in Canada is integral to the overall stability of the Canadian financial system. There are really two areas in which our members impact the financial system.
One is that the financial markets are largely dominated by large institutional players. Our member funds have responsibility for oversight and management of over $940 billion in assets, so that has a significant impact. Any activities in the pension industry impact the capital markets.
The other area is that defined benefit pensions have a significant impact on the economic well-being of millions of Canadians. Those both go to PIAC's mission to promote sound investment practices and good governance for the benefit of pension plan sponsors and pension plan beneficiaries.
In the submission that PIAC made on March 13, PIAC proposed that the Government of Canada could take steps to alleviate some of the funding and regulatory challenges that pension plan sponsors are facing. Those are related to the shrinkage in defined benefit plan coverage in Canada. That decline is more pronounced for private sector workers. The fundamental reasons for the decline and for the greater impact on private sector workers are the funding challenges, the risk-reward asymmetry, and a complex regulatory regime.
There are three steps that PIAC proposes the Government of Canada could take. The first of those steps is to ease the solvency funding requirements and address the risk-reward asymmetry in the rules regarding surplus entitlement. The reason for focusing on solvency funding is that the solvency calculation is only one of two calculations to determine the funded position of a pension plan. Solvency is hypothetical in the scenario where there's a plan wind-up. The stronger the plan sponsor and the less likelihood of a wind-up, the less relevant is the solvency calculation.
So we're focusing on solvency relief as being a key component in that first step. That can be done by unconditionally extending the amortization period for solvency funding from five years to ten years for financially strong companies. It could also be achieved by providing plan sponsors with the flexibility to use letters of credit, which already exist on a permanent basis in both Alberta and British Columbia. It could also be achieved by permitting plan sponsors to establish special purpose accounts--we're calling them solvency accounts--that are independent from the main pension trust. If we do that, we will avoid the situation of trapped surplus, in which plan sponsors make solvency payments that in the future form part of a surplus. In the past, those surpluses have resulted in changes to the benefit structure that have been long-term and permanent. If the solvency account is independent from the main plan trust, that alleviates the situation of that trapped surplus.
The second step the Government of Canada could take is to facilitate the opportunity for plan sponsors to enhance the funded position of their pension plans, when they are able to do so, by amending the Income Tax Act to allow plan sponsors to make contributions beyond the current 110% to at least 125%. Doing that would allow a more sufficient cushion to be built during the good times to provide some downside protection in the tough times.
The final step that could be taken is to hold pension investments to the standard of a prudent person and eliminate all quantitative limits on investing. I'll focus on two reasons for eliminating the quantitative limits: one, it puts Canadian pension plans on an unlevel playing field with foreign pension plans and foreign jurisdictions not subject to those restrictions; and two, it's arbitrary.
In conclusion, funding flexibility and regulatory relief will safeguard the long-term viability of defined benefit pension plans, thus contributing to the overall stability of the Canadian financial system.
Thank you.