Feds to step in with pension plan reforms

NationalPost.com – financialpost.com/personal finance/RRSP
Sunday, Dec. 26, 2010.   Elizabeth Thompson, iPolitics.ca

Ottawa is planning changes to company pension plan rules that fall under federal jurisdiction in a bid to help the plans weather short-term downturns and better protect workers.

Under regulations being proposed by the finance department, pension plan administrators would be able to use letters of credit in lieu of making required payments to pension plans. However, letters of credit could not make up more than 15% of the plan’s assets.

The proposal would require a plan sponsor to fully fund pension plan benefits when a plan is terminated and allow sponsors, plan members, and retirees of a plan in trouble to negotiate a plan restructuring.

“The proposed amendments would provide plan sponsors with the tools to better manage their funding obligations and give them greater flexibility to fulfil their obligations and to protect the interests of plan members and other beneficiaries,” finance department officials wrote.

However, critics like the NDP’s Wayne Marston and Liberal Judy Sgro say the proposed changes don’t go far enough and won’t help those whose companies file for bankruptcy protection. They are also concerned about the proposal to let companies use letters of credit to top up their pension plan obligations.

“That scares me,” said Mr. Marston.

Mr. Marston and Ms. Sgro said the government has to do more to protect pensioners when a company files for bankruptcy or bankruptcy protection.

Ms. Sgro plans to ask Parliament’s finance committee to take a closer look at the planned changes.

The proposed changes come in the wake of the economic downturn that left many company pension plans battered and underfunded. In its 2008/09 annual report, the Office of the Superintendent of Financial Institutions estimated that 83% of all defined benefit pension plans that fell under federal jurisdiction were underfunded with estimated liabilities exceeding assets.

While most pension plans in Canada fall under provincial jurisdiction, the OSFI oversees plans of 1,380 companies that fall under areas of federal jurisdiction such as telecommunications, banking and inter-provincial transportation — roughly 7% of all pension plans in Canada.

In its explanation of the proposed changes, the finance department describes the toll the last few years have taken on pension plans and how many were in trouble even before the recession hit.

“In the early to mid-2000s, a sharp decline in long-term interest rates along with changes in actuarial standards, such as longevity assumptions, resulted in increased plan liabilities. Combined with poor investment returns, these factors led to many plans being underfunded on a solvency basis. More recently, the 2008 global credit crisis led to a sharp decline in global equity markets, which further reduced the funded status of federally regulated pension plans.”

Although the government introduced temporary solvency funding relief regulations in 2006 and 2009 as well as special regulations to deal with problems with the Canadian Press and Air Canada pension plans, it says a more permanent solution is needed.

The proposed changes are part of the government’s strategy announced in October 2009 and follow the Jobs and Economic Growth Act adopted by Parliament last summer.

While the Act allowed employers to provide letters of credit instead of making required payments, the proposed regulations would limit letters of credit to 15% of plan assets and spell out who exactly could issue those letters of credit.

To prevent companies from terminating plans without enough assets to pay all the promised benefits, the proposed regulations require plan sponsors to fund any deficiency that exists at the date a plan is terminated and gives them no more than five years to do so.

Another proposed change allows pension plan sponsors, employees and retirees to negotiate changes to allow companies in trouble to stay afloat.

“The workout scheme is intended to be used by plan sponsors who are legitimately at risk of immediate insolvency unless relief on pension obligations is forthcoming,” wrote officials.

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