© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the June 2006 edition of BENEFITS CANADA magazine.
Frontlines: Flaherty’s fixer-upper
Yes, pensions were in the budget. What now?
By Joel Kranc

The first Tory budget in over a dozen years was an attempt to be all things to all people, even within the pension industry. But the portion of the budget dedicated to proposals that would give federally regulated defined benefit (DB)plans extensions on amortizing solvency payouts as well as using letters of credit to help in deficit situations, was what some sponsors wanted to hear.

The consensus thus far has been that the sentiment appears to be good. But the DB provisions’ ability to solve the current financial woes of the pension world in Canada are in question. Jill Wagman, pension practice leader with Eckler Partners in Toronto, says they don’t really change the funded status of pension plans but they do allow plan sponsors to defer funding. “It’s shortterm relief,” she says of the budget and, “it will reduce contributions in the next couple of years. But it won’t necessarily reduce them in the long-term.” However, there could be extra costs and administrative burdens associated with the extra five years on the amortization, Wagman warns.

The next step, she says, is to hope that other provincial regulators will go the extension and letter of credit route(as Quebec already has). “I think there’s going to be a lot of pressure, particularly in Ontario, for them to move in this direction as well,” says Wagman.

And, as is the case with many governmental proposals, the industry is remaining cautiously optimistic about the budget proposals. Greg Hyatt, director, pension plan management for Canadian Pacific Railway in Calgary, which happens to be a federally regulated company and pension plan, says there are not enough specifics for him to make any changes to his current plan and funding strategy. “It is a positive step. However, it is too early to respond on the proposed government action. We will need to understand much more of the specifics around the proposal before a definitive course of action is determined,” he says. “CP Rail will continue with its existing pension funding process and will wait for more information prior to making any changes in its funding activities.”

Given that the proposals only affect federally regulated plans, there is still a lot to be done to stem the tide of pension underfunding. But at least, many feel, the federal budget has put that dialogue back in the foreground.

Budget Breakdown

The first federal Conservative budget in 13 years was released on May 2, 2006. It contained several surprises for the pension and benefits industry.

Pension funding relief
The four new temporary measures, if enacted, will enable federally regulated defined benefit pension plan sponsors to:

  1. Consolidate solvency payment schedules and amortize the entire existing solvency deficit over a single, new, five-year period.
  2. Extend the period for solvency deficit payments to 10 years from five years.
  3. Extend the period for solvency funding payments to 10 years when the difference between the five-year and 10-year level of payments is secured by a letter of credit.
  4. Extend the period for making solvency funding payments to 10
  • The budget allocates a portion of unplanned fiscal year-end federal surpluses, in excess of $3 billion, to the Canada Pension Plan and the Quebec Pension Plan.

The budget also included some healthcare proposals:

  • To increase cash transfers to the provinces and territories by 6% every year until 2014. That will mean an additional $1.1 billion in 2006-2007 and another $1.2 billion in 2007-2008.
  • To move up the provinces’ deadline— from December 2007 to the end of this year—to identify wait time “access targets” for key medical procedures.

Joel Kranc