Good afternoon, ladies and gentlemen.
Thank you for inviting me here today.
My name is Judy Cameron, Managing Director of the Private Pension Plans Division of the Office of the Superintendent of Financial Institutions (OSFI). OSFI is tasked with implementing the laws and regulations put in place by Canada’s Parliament. Our regulatory mandate includes banks, insurance companies and federally regulated private pension plans. We regulate and supervise about 7% of all private pension plans in Canada, representing about 12% of total pension assets.
Today I will briefly outline some of OSFI’s perspectives on the current state of the pension industry and our expectations of plan administrators.
Everyone is aware of the financial and economic turmoil of the past two years. We have seen sharp declines in stock markets globally while at the same time long-term interest rates have remained close to their historical lows. These developments have produced a double hit to defined benefit pension plans, as the value of pension assets and liabilities fluctuate with changing financial and economic conditions. The impact of this is reflected in OSFI's solvency testing results.
As you may know, pension regulations do not require defined benefit pension plans to be fully funded at all times, but where the ratio of assets to liabilities on a solvency or liquidation basis is less than one, the plan must make payments to address the deficiency. The provinces and many other jurisdictions have similar rules.
OSFI requires underfunded pension plans to file an annual valuation report. In addition, we estimate solvency ratios for federal pension plans every six months to provide a snapshot of the financial health of the defined benefit pension plans we regulate. Our most recent solvency testing results show that the average estimated solvency ratio, or ESR, of federal plans as of June 2009 is 88%. That is to say, on average, the market value of pension plan assets would be sufficient to cover 88% of promised benefits.
The estimated solvency ratio of 88% for June 2009 represents a modest improvement from the December 2008 figure of 85%. So while the situation has improved somewhat, the degree of underfunding remains significant. The solvency testing results also suggest that pension plan sponsors will continue to face funding challenges in the current economic environment and that plan sponsors and administrators must continue to be vigilant.
OSFI's primary objective in running solvency tests is to detect problems and challenges early on so that we can, working together with pension plans, take steps to safeguard members' benefits.
Solvency testing is a key element of OSFI's enhanced monitoring of federal pension plans. We will continue to identify underfunded pension plans and take action ranging from encouraging plan sponsors to cease contribution holidays to requiring enhanced notification to members or requesting early valuation reports.
OSFI has a risk-based approach to supervising pension plans, tailoring our activities to the risk profile of our plans. Over the past 18 months we have put particular focus on plans that have been most challenged by market conditions.
Regulation alone cannot improve the environment for pensions. Effective plan governance is also critically important to controlling risks. A key focus of OSFI's supervision is therefore an assessment of the quality of pension plan governance.
OSFI continues to remind plan administrators to be prepared for a wide range of potential shocks or adverse events and to use regular scenario testing as a risk management tool. We believe regular scenario testing will help plan administrators understand the risks they face. We also encourage plans to develop funding policies, as this is one way to be clear about the level of risk they are comfortable with.
Governance is not one-size-fits-all. More complex benefit structures or more sophisticated investment products and strategies will require more sophisticated governance procedures and more time and effort to assess and monitor risks.
OSFI recognizes that Canadians are concerned about the health of their pension plans. It is important that governments, regulators, and pension plan administrators work together to meet the challenges facing private pension plans.
Thank you, and I would be happy to answer any questions the committee might have.