The federal government is giving employers with pension deficits more time to get their houses in order.

The budget is proposing four temporary measures that are designed to help defined-benefit pension plans improve their funding positions.

Currently, many plans are underfunded; some, quite significantly. The federal pension regulator, the Office of the Superintendent of Financial Institutions, has estimated that, as of June 30, 2005, 72% of federally regulated defined-benefit plans had a solvency deficit of some sort. OSFI also estimates that DB plans on average are only 91% funded, down from 100% at the end of 2004.

“Many plan sponsors, while committed to funding their plans, have raised the concern that the recent large funding requirements are driving excessive cash flow away from expenditures that could enhance productivity and competitiveness and benefit the economy more generally,” the government observes. Indeed, it warns, some companies say these obligations “are creating significant financial stress and could affect their ongoing viability.”

To avert such trouble, the government proposes four temporary solvency funding-relief measures. The detailed measures and their terms and conditions will be set out in draft regulations to be published for comment shortly. However, the budget gives an outline of the measures the government plans to take to allow firms more time to deal with their deficits.

Current pension legislation requires solvency deficits to be funded over five years. Under the measures proposed in the budget, plan sponsors will be allowed to consolidate solvency payment schedules and amortize the entire solvency deficit over a single, new five-year period. “This will have the effect of smoothing outstanding solvency payment obligations through five equal payments over the next five years,” it says.

Plan sponsors will also be permitted to extend the period for making funding payments to 10 years from five years, subject to the buy-in of plan members and when the difference between the five-year and 10-year level of payments is secured by a letter of credit. Federal Crown corporations will also be permitted to extend their funding payment period to 10 years.

In situations in which companies propose extending the funding period to 10 years, plan sponsors will be required “to demonstrate that plan members are fully informed and that no more than one-third of current plan members or retirees object to the change,” the budget indicates.

This temporary funding relief will only be available to plan sponsors whose funding payments are up to date and only available for the first valuation report filed with OSFI before 2008.

The government says it will continue to monitor defined-benefit pension plans and consultation submissions to determine if further action is needed.