If you have been reading the papers, you have probably seen at least one article talking about the pension funding “crisis” in Canada. At this time, many workplace defined benefit pension plans – plans that promise a specific benefit at retirement – have significant funding shortfalls that would, if the plans were immediately terminated, force a reduction in earned benefits.
These funding shortfalls are the result of several factors:
- the historical lows in long-term interest rates, which raise the estimated cost of promised benefits in solvency valuations (which estimate the financial situation of the plan if it were immediately to terminate).
- the lingering effect on plan investments of the two bad earnings years of 2001 and 2002, even though the markets have since rebounded.
- 2005 changes in actuarial practice for calculating solvency liabilities further raised estimated costs.
Many pension funds are also in a deficit position because, through the 1980s and 1990s, employers used the surpluses generated by high investment returns to take regular contribution holidays, and even take cash out of the plans, rather than contributing and leaving the money to fund the bad years.
It is had to tell whether this shortfall will continue to be a problem for years to come. Since that are a lot of volatile factors involved in estimating pension costs, sensible people should expect ups and downs in pension funding. Because investment returns were so consistently good for so long, corporate financial executives got used to pension plans being very cheap, if not free (or even a source of cash). In fact, even now, if long-term interest rates rise as little as 1-2%, towards more historically-common levels, the apparent funding deficits in most plans will disappear.
When times were good, employers always said that the surplus all belonged to them, since they claimed to be fully responsible for deficits. Now that there are pension deficits, employers are complaining bitterly about meeting their responsibilities. Where they can (as in most non-union environments), many employers are winding up their defined benefit plans, or converting them to a defined contribution basis that shifts all of the risk to individual plan members. Others are pushing members to accept benefit reductions.
Employers complain that the current system is unfair and unbalanced, but it is the employers who have been getting more than their share of the surpluses, and carry less than their share of the risk. Some are even complaining, illogically, that limits on their unrestricted access to plan surpluses contributes to underfunding.
Employers have been saying that there needs to be more incentive (that is, an even more unbalanced deal) for employers to maintain workplace pension plans. But workplace pension plans – particularly defined benefit pension plans – exist in Canada not because they were given willingly by employers, but because workers, particularly unionized workers, demanded them. While most unionized workers belong to pension plans, less than 20% of private sector non-unionized workers have pension coverage. Without unions, practically the only people with defined benefit pension plans in this country would be senior executives.
So now employers, after many years of taking surpluses, are seeking changes in the funding rules to lessen the corporate financial burden – most commonly to lengthen the five-year period for paying off solvency shortfalls.
New Brunswick and Quebec have already amended their legislation to allow a longer funding period. In June, the federal government released draft “Solvency Funding Relief Regulations” that would allow employers to stretch their funding of solvency shortfalls over 10 years, unless a third of plan members or retirees object.
While it is debatable whether the arrival of (to-be-expected) pension deficits constitutes a “crisis”, there is an argument for some flexibility in the solvency funding arrangements. For financially-pressed companies, the five-year funding requirement can be a serious problem. A special 10-year funding arrangement helped Air Canada avoid bankruptcy.
Unfortunately, lengthening the funding period puts less money into the pension funds in the short run, increasing the risk that plan members will lose benefits if the employer fails. In its submission to the federal government, the IAM has argued for a more balanced approach. If benefit security is reduced though lengthened funding, this should be offset by other measures to enhance security.
First, the federal government should make the employer liable, if a plan winds up, to make up the shortfall in the plan. This is the law in Ontario, Quebec, Manitoba, Alberta, B.C. and Newfoundland, but the Saskatchewan, N.B., N.S. and federal jurisdictions allow employers to walk away from their promises if they wind up their plan.
There needs to be a pension benefits guarantee fund (now only in Ontario), to protect benefits if employers go bankrupt. Pension shortfalls should also have higher priority in bankruptcy proceedings. Restrictions on employer contribution holidays are important. If they had been in place over the last couple of decades, most plans today would be much better funded.
Unfortunately, the federal government ignored these positive proposals, apparently listening only to employer whining. Their draft regulation reduces benefit security with no compensating improvements.
Particularly galling is the government’s claim that they will require plan member “buy-in” for the longer funding period. According to the regulation, the employer does not need to get any member approval. Rather, stopping the change requires a third of plan members to officially object within three weeks of being “notified”. When the cable TV companies tried to use this “negative option billing” technique, it was made illegal. And unions will not be allowed to represent their members, as is the case in other parts of the legislation.
Since the regulation requires only Cabinet approval, the Tory government can put this regulation into force without going to parliament. If they go ahead with this unfair and unbalance proposal, they should expect to hear from plan members and pensioners in the federal election, we are likely to see in the next year. Ask your MP what he is doing to protect the pensions of his constituents.
