Thank you very much, Mr. Chair.
Good afternoon. My name is Lynn Hemmings. I'm the senior chief of the pensions team in the financial sector policy branch at the Department of Finance.
I'm here today to answer your questions about the Canada Post pension plan, but let me first provide you with a bit of context on the funding requirements under federal pension legislation, the Pension Benefits Standards Act, or PBSA.
Under the PBSA, the federal government regulates the plans of crown corporations and private sector plans covering areas of employment under federal jurisdiction, such as telecommunications, banking, and interprovincial transportation. At this time, there are over 1,200 federally regulated pension plans, and over 300 of those are defined benefit plans. Canada Post's is the largest defined benefit plan under federal jurisdiction, with almost $22 billion in plan assets as of December 31, 2015.
Under the PBSA, defined benefit pension plans are required to be funded on both a going concern and a solvency basis. “Going concern” assumes the plan operates indefinitely, whereas solvency assumes the plan is terminated and all the promised pension benefits must be paid immediately.
The intent of the solvency funding requirement is to protect the pension benefits of plan members and retirees by ensuring that plan assets are sufficient to meet the plan's full obligation. In cases where a plan does not have a solvency funding deficit, the PBSA provides the flexibility to fund that deficit over a period of five years.
Today, some plan sponsors continue to face funding challenges for their defined benefit plans as a result of a combination of factors, including the ongoing low interest rate environment, volatile market returns, and increasing life expectancy of retirees. Over the last 10 years, the government has implemented a number of reforms to provide funding relief to plans to address these challenges.
In 2006, a sharp decline in long-term interest rates combined with poor investment returns and increasing life expectancies resulted in solvency deficits in many plans. To help alleviate these pressures, the government passed temporary solvency funding relief measures that allowed solvency deficits to be paid over a longer period. Following the implementation of these measures, funding levels in plans began to improve.
In 2009, following the financial crisis, plan funding levels began deteriorating again as a result of the significant decline in global markets and even further reductions in interest rates. To help plans address these challenges, the government once again passed temporary funding relief measures. As it became apparent that low interest rates and uncertain market returns were becoming the new normal, the government moved to put in place permanent relief measures. These measures included allowing the use of letters of credit to cover solvency special payments up to a limit of 15% of the market value of plan assets and moving to a three-year average for the calculation of solvency ratios in order to reduce the volatility of a plan's deficit.
For pension plans facing unique financial challenges, the Minister of Finance has the authority to grant funding relief through the use of special regulations. In the case of Air Canada, for example, in order to provide the company with the time needed to restructure its operations, its pension plan was exempted from solvency funding requirements from 2014 to 2020 in exchange for making payments of at least $150 million per year into the plan. As a result of improving its business operations, changes in plan design, and new investment strategy, Air Canada has been able to eliminate its solvency deficit and announced in May 2015 that it was opting out of the special regulations, with the pension plan now in surplus.
The Minister of Finance has also exempted Canada Post from solvency funding requirements from 2014 to 2018. This funding relief was provided within the context of a continued decline in mail volume and little to no net income generated by the corporation. As with Air Canada, the purpose of the relief was to provide Canada Post with the time to make itself financially sustainable. As this funding relief is set to expire at the end of 2017, we are continuing to monitor the developments in Canada Post's pension plan.
We look forward to hearing the recommendations of this committee on the business operations of Canada Post, which will help to inform our advice to the Minister of Finance on the pension plan going forward.
Thank you.