Employer and employee advocates are squaring off over a federal Finance Department consultation paper on possible changes to the Pension Benefits Standards Act.

The major bone of contention in the consultation on the act, which governs defined-benefit pension plans in federally regulated industries, is whether employees are entitled to part of a pension plan surplus in the event of the partial windup of the plan.

Although a recent Supreme Court of Canada decision granted some Ontario employees partial entitlement, plan sponsors in general are opposed to amending federal rules to allow it.

The paper also raises other controversial issues, including extending the solvency requirements for either financially vulnerable or financially strong companies, using letters of credit from banks as a tool to provide funding flexibility and establishing a pension-benefit guarantee fund.

> Employee entitlement. The issue of employee entitlement to plan surpluses is on the agenda because of the July 2004 SCC decision, Monsanto Canada Inc. v.
Ontario Superintendent of Financial Services.

In that case, the SCC granted 146 former employees the right to $3 million of the company’s $13-million surplus, as a result of the “partial windup” of the company plan.
Partial windups can occur when a company shuts down or sells one of its divisions, for example.

As pension plans are theoretically intended to be indeterminate, the SCC decided in Monsanto that it’s not reasonable for affected plan members to be subject to plan risk after they’ve been terminated from the plan. Therefore, a partial distribution should be required upon partial windup.

The SCC’s decision only applies in Ontario.
However, “questions have been raised about its application to the PBSA,” says Finance in its consultation paper.

The SCC decision makes sense because it was based on the Ontario legislation, says Steve Bonnar, a principle with pension consulting firm Towers Perrin in Toronto.
However, he adds, the Ontario legislation “should be fixed” to match other Canadian jurisdictions, which don’t allow for partial distribution on partial windup.

Stephen Bigsby, executive director of the Toronto-based Association of Canadian Pension Management, agrees. ACPM represents employers/plan sponsors and plan administrators who don’t want to pay out partial distributions.

“We’re probably looking at amendments to make that clear,” he says, noting that the ACPM agrees with Finance and the Office of the Superintendent of Financial Institutions on this issue.

Finance and OSFI intervened in the Monsanto case through representation by lawyers from the attorney general of Canada’s office.

All the same arguments rejected by the SCC are being raised again by Finance in its discussion paper, says Ari Kaplan, a partner in the pension and benefits law group at Toronto-based union-side law firm, Koskie Minsky LLP.

A partial plan windup doesn’t present a risk to employers, Kaplan says. Moreover, he adds, a fairly distributed plan attracts good employees and improves the corporate bottom line.

> Solvency requirements. There is also debate over extending the present solvency requirement — the time in which a company must top up its plan to make it solvent — from five to 10 years, and to whom it should be extended.

The issue is whether there should be a legal requirement enabling an extension beyond five years, says Bigsby. The criteria under which companies should be permitted a 10-year limit to make their plans solvent is a problematic area. “These are difficult rules for both the private and public sector,” he says.

If an extension is negotiated between the employer and employees as a way to save the company and pension plan, an extension from five to 10 years could have “a useful purpose,” says Kaplan.

This what happened in the case of Air Canada, when bankruptcy was pending and special dispensation extending solvency was granted. The extension was a factor in helping Air Canada get back on its feet and in saving the pension fund.

However, says Kaplan, “As a general rule, [extensions are] bad.”

Bonnar suggests an alternative approach to monitoring plan solvency, based on risk:
“We should recognize the risk taken by a plan. There should be minimum [solvency] requirements for plans that take more risk than plans that take less risk.”

This may not be easy to implement, he says, but it would be a better regulatory structure than the present one, which is based solely on plan solvency.

> Letters of credit. Letters of credit could be used to address solvency shortfalls, says Bigsby, especially by employers/plan sponsors with cash that would rather put the money into their businesses.

@page_break@Federal legislation doesn’t recognize a letter of credit as an asset that could be put toward solvency, says Kaplan: “It’s essentially an IOU. It’s not a cash contribution.” However, like a solvency extension, it might be a useful tool if it’s part of a negotiated agreement between employer and employees, when a company’s survival is in question, he says.

> Pension-benefit guarantee fund. The possibility of a federal pension-benefit guarantee fund “is a controversial issue,” says Bigsby. The only jurisdiction with such a fund in Canada is Ontario.

These funds are normally established with “premiums” paid by employers. The U.S.
and Britain also have guarantee funds, notes the federal discussion paper, but both the Ontario and U.S. funds have significant deficits.

Ottawa will have to convince employer/plan sponsors that a pension-benefit guarantee fund would be viable, says Bigsby.

Towers Perrin’s Bonnar thinks there is no proven need for such a fund. “If we solve the problem of how to determine minimum contributions based on risk, we would get rid of the need for a PBGF,” he says.

Kaplan counters that employees could share some of the responsibility for the solvency of the guarantee fund. As with employers, they could be asked to make contributions. “Risk-sharing would be a fair
trade-off,” he says.

Ottawa is looking for responses from the pension industry by Sept. 15, 2005. The discussion paper can be found at www.fin.gc.ca/activty/consult/ppbnfts_1e.html. IE