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© Copyright 2000 Rogers Media. The following article first appeared in the April 2000 edition of
BENEFITS CANADA magazine.
From wind-up to settlement
Gloria's employer went bankrupt back in 1994. Why is she still waiting for a pension
settlement?
By Mel Norton
The December 1997 edition of BENEFITS CANADA told the story of Gloria, who was a 20-year member of a
defined benefit pension plan registered in Ontario. Gloria's employer went bankrupt in the fall of 1994.
After a lengthy delay, the appointed administrator offered Gloria two options:
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Retain promised benefits.Gloria's benefits involved a non-indexed lifetime retirement income of about
$1,100 per month, commencing at age 65.
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Portability. Gloria could elect to surrender her defined benefit entitlement in return for a transfer
of approximately $27,000 to her locked-in retirement account (LIRA).
The options, equal at least in theory for the plan in 1994, were never actually equal for Gloria and are
certainly no longer equal for Gloria today. The deferred pension (which Gloria chose) was clearly the
option that was in her financial best interest. It turns out, however, that the appropriate choice is only
one part of this story.
In accordance with an actuarial report filed in September 1996 with the Pension Commission of Ontario,
Gloria's plan was adequately funded at the time of the wind-up. Assets exceeded liabilities by
approximately 10%. To date, however, no settlements have been made. In mid-November 1999, the administrator
wrote to former members and advised that while assets had grown by about 50%, liabilities had almost
doubled. As such, the administrator estimated that there was an unfunded liability of between 15% and 20%
of the total liability. This unfunded liability will almost certainly continue to increase as time passes.
Moreover, the administrator ad-vised Gloria that a claim would be launched against the Pension Benefits
Guarantee Fund (PBGF). The admin-istrator hoped that additional funding would be provided by the PBGF. PBGF
funding, if provided, would permit most--if not all--of the plan's liabilities to be met in full. The
administrator suggested that assets would be distributed by June 30, 2000 in accordance with the selections
made by each former member, either through the bulk purchase of deferred or immediate pensions, or through
portability transfers to individual LIRAs.
DELAY RAISES QUESTIONS
It will take about six years to distribute the assets of this defunct plan. Although the five- to six-year
period to fully wind-up a pension plan is not the norm, such wind-ups have typically required long periods
of time. In this case, the financial situation of the plan was adversely affected by an unprecedented drop
in interest rates which caused substantial increases in liabilities for deferred or immediate pensions (see
"The interest rate effect," above).
Such a lengthy delay raises a number of questions. Should the administrator of a solvent plan at bankruptcy
be empowered to settle basic pension benefits as soon as possible? This would leave ancillary benefits
and/or surplus allocation to be addressed after actions have been taken to ensure that the financial
position of a solvent plan does not deteriorate during the time it takes to implement the settlement of
basic benefits.
Can the wind-up process be sped up in the event of a bankruptcy where there is no plan sponsor to cover any
future deficit? Can delays associated with the appointment of an administrator be substantially shortened?
Should the regulator look at the possibility of appointing the firm that had been providing services to the
plan prior to the bankruptcy since that firm could presumably commence work immediately? Can wind-up
reports be prepared with greater care to avoid revisions or supplements and can they be approved on a more
timely basis to avoid deterioration of the financial position of the plan in the meantime? How can we
reconcile the need to make sure that all issues have been addressed with the need to proceed?
Does the existence of two legislative options, either a deferred or immediate pension or a commuted value
transfer to a LIRA, continue to make sense in a wind-up situation? When a member terminates his or her
membership, this choice makes sense as the settlement is generally immediate. However, in a lengthy process
such as a wind-up, plans generally have investment policies that will ensure, over a period of time, that
assets are invested on a short-term basis while at the same time producing less than the long-term returns
consistent with the underlying assumptions of commuted values.
The experience accumulated over the last 10 years with respect to plan wind-ups suggests that corrective
actions may be warranted to better protect the interest of the plan members through a speedier process.
Changes have occurred in accepted actuarial practices since the date of wind-up of Gloria's plan. Today, a
solvency valuation must include a specific provision for wind-up expenses incurred and additional
provisions must be included to reflect any expectation of losses on annuity purchases. The annuity purchase
provision, however, is based on market conditions at the valuation date, not at some date several years
into the future when the current market conditions may have changed dramatically.
Even if these new actuarial requirements had been applicable in the fall of 1994, there may have been no
solvency deficiency revealed at that time. Therefore, while new actuarial valuation requirements may
minimize the probability of plans moving from an adequate funding level at wind-up to an inadequate funding
level at a subsequent settlement date, changes to promote prompt settlement should also be seriously
considered.
Mel Norton is a senior vice-president with Aon Consulting in Toronto.
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