As the global credit crunch has the world on edge, Canada’s federal finance minister is moving to give pensioners and fund sponsors a little peace of mind. Jim Flaherty has indicated that the government will be introducing new rules to give managers of federally funded pension plans some breathing room.
“We’re reviewing [the rules] now in the Department of Finance,” he told reporters, “with a view to seeing what can be done to help pension funds at this particular time, given the global circumstances.”
One option that is apparently on the table is giving companies more time to make up funding shortfalls. At present, firms have five years to ensure their pension plans are fully funded.
Experts are divided on the appropriateness, and the benefits, of such a move.
“It will help plan members,” says Paul Forestell, leader of the Canadian retirement professional group with Mercer (Canada) Ltd. in Toronto. “More companies will survive.”
Forestell points out that many companies have either lost, or will lose, assets in the current economic crisis, which means they must increase cash contributions to their pension fund to make up for these losses. “If companies can’t make those payments,” he says, “the plan will wind up. Members will get less.”
Niels Veldhuis, director of fiscal studies and a senior economist at the Fraser Institute in Vancouver, disagrees: “If you allow pension plans to have unfunded liabilities, it creates a moral hazard. It’s absolutely critical that we continue [requiring] pension plans to be fully funded.”
Indeed, in a new study, Toronto-based C.D. Howe Institute contends that the decline of defined-benefit pension plans in Canada is being exacerbated by federal laws and regulations that foster employer underfunding.
In the end, the question of whether to intervene or not has no clear answer, says Calvin Jordan CEO of the Nova Scotia Association of Health Organizations Pension Plan in Halifax: “When you see a pension plan that has a desperate enough situation it can’t pay off over five years, is the best option to extend and protect benefits? On the other hand, if you extend and the organization fails, the risk is greater.”
One way to predict the future is to look to the past. The Dept. of Finance is quick to point out that such relaxing of pension funding rules would not be a first for the country, says Suzanne Prebinski, its media relations and consultations officer: “The government has acted in the past to provide funding relief for pension plans facing difficult circumstances.”
In fact, Flaherty introduced new regulations to provide temporary funding relief for federally regulated DB pension plans, which make up about 10% of all plans in Canada, only two years ago. Among the options available to plan sponsors at that time: consolidate previous solvency payment schedules and amortize the entire solvency deficiency over a single, new five-year period, or extend the solvency funding payment period to 10 years from five years with buy-in from members and retirees.
Such relief should not be necessary if plans are well managed to begin with, Veldhuis contends: “The question is whether pension plans are operating in a prudent manner. There are ups and downs in the market.”
And then there is disaster. “There is risk in a pension fund,” Forestell says. “But what’s happened in the past three months goes beyond what anyone could have expected.”
On that point, everyone seems to agree. In fact, calls for pension relief started as early as a year ago. In October 2007, Financial Executives International Canada, the professional membership association for senior financial executives, appeared before the Ontario Expert Commission on Pensions and called for an immediate increase in the funding period for solvency deficits.
“Under the current windup solvency rules, financially strong companies would be forced to divert significant cash flows in the short term from their successful capital investments,” Peter Donovan, chairman of FEI Canada’s pensions task force, said at the time. “This could negatively affect our economy as far as limiting corporate growth and development, liquidity and shareholder benefits.”
FEI Canada recommends that the pension solvency funding period be increased from five years to the lesser of the remaining active service life and the long-term funding period of 15 years.
Some provinces are listening. Nova Scotia, for example, has relaxed its funding rules, while Alberta and British Columbia are collaborating on a comprehensive review of pension standards “to ensure pension plans continue to benefit workers, employers and investors.”
@page_break@And pressure to do something continues to mount. The financial health of Canadian pension plans was markedly worse as the market tumbled through the end of September. The Mercer pension health index was down by about 6% from the end of the second quarter, and by about 10% for the year.
“All major markets delivered negative returns last quarter,” says Peter Muldowney, business leader for Mercer’s investment consulting business in Canada. “This was the worst quarter in exactly 10 years for the typical balanced fund.”
Action — albeit short-term action — is what’s needed now, says Forestell: “What’s realistic to expect is temporary relief.”
In fact, that’s all the government will have time to implement if new regulations are to have any impact on the current reality facing pension plan sponsors.
But once the pressure to act is alleviated, government, sponsors and members need to take a close look at DB pension plans in this country, Forestell says: “We have needed this [relief] twice in the past 10 years. That indicates there is a problem. This funding crisis is not unique. It is going to happen wherever there are DB pension plans.” IE
Feds move to give pension managers breathing room
Although the government is looking at giving companies more time to make up funding shortfalls, experts are divided on the move
- By: donalee Moulton
- November 10, 2008 November 10, 2008
- 13:23