IN PRINT ARCHIVE CIR Winter 2007
By Gilles Bernier, professor of finance and insurance, Laval University
On December 13, 2006, Bill 30 was adopted in Quebec.1 Its purpose is twofold: to improve the funding of defined benefit (DB) plans; and to enhance the governance of pension plans and better define the scope of the responsibilities of pension committee members and other parties involved in the administration of pension plans. Among the new governance measures included in Bill 30 is the requirement for pension committees to adopt internal bylaws that must cover, among other things, risk management measures intended for the plan.2 During my presentation, I raised the question of whether Bill 30 makes it easier or not for pension committees to manage risk in a more integrated way, and what is needed to do so.
My own prediction is that Bill 30 should gradually lead to more integrated risk management on the part of pension plans registered in Quebec. In my view, this has to do with the fact that plans will now have to adopt a risk management process [risk identification, assessment, control, financing and monitoring] to help them focus on risk management issues. For DB plans in particular, the adoption and application of a risk management process will also gradually require pension committees to recognize the importance for a plan’s sponsor (ultimate payer) to reveal its goals, priorities and risk tolerance in a formal funding policy.3 As such, that’s very good news.
It is well known in the field of pension (for example, see Labrosse (2005)) that a formal funding policy is the basis for doing the modelling that will help committees: (1) identify risks to which sponsors and members are exposed; (2) find out ways for better managing risks (e.g., applying ALM or LDI); (3) choose a more proper asset mix; (4) better communicate and explain to interested parties the plan’s financial situation; (5) optimize the plan’s operations; (6) better align the plan’s financial obligations with the needs and financial objectives of the sponsor and, (7) adopt governance best practices.
With Bill 30, Quebec did not go as far as directly forcing plans’ sponsors to elaborate a funding policy. Perhaps it should have. This is what the expert committee recommended as the basis of a balancing act describing what the relationships among key players in a DB plan ought to be.4 Instead, Quebec took an indirect approach by imposing a focus on risk management in a plan’s bylaws. Hopefully, this will very likely lead to the same outcome.
In closing, while Bill 30 was being written, politicians from the opposition raised the possibility for Quebec to set up a guarantee fund that would protect pension benefits of workers, such as in the USA (PBGC) and in Ontario (PBGF).5 After a great deal of discussion, the government of Quebec finally did not retain this option.