The Pension Investment Association of Canada isn’t supportive of providing a super-priority for unfunded pension liabilities and other post-retirement benefits in an insolvency situation.
“While we recognize that the intention of such a change would be to enhance retirement security for plan beneficiaries, we believe that overall impact on the retirement income system would be negative,” wrote the association in its response to the federal government’s consultation into potential gaps in the Canadian pension regulatory framework.
Most private sector plan sponsors rely on bank and/or capital markets financing to operate their businesses “such that preferred creditor status for unfunded pension liabilities would impact the cost and availability of credit for companies that sponsor DB plans,” noted the letter.
“Moreover, the impact would be highly procyclical and most acute during periods when lenders are most concerned about pension deficits, which is typically recessionary periods when businesses are already facing more difficult operating conditions. For companies facing severe business challenges, preferred creditor status would likely reduce the availability of new capital to effect a turnaround . . . companies which sponsor DB plans would be disadvantaged in terms of cost of capital relative to competitors that do not sponsor DB plans, and this would no doubt lead to a re-assessment of the overall strategic value of the DB plans to those businesses.”
PIAC believes the creation of a super-priority in bankruptcy would have “broad systemic implications” for companies that offer DB plans. In the absence of data, “it is difficult to assess the potential offsetting benefits in terms of additional security to the Canadian system,” said the letter. ”PIAC believes the debate around this complex issue would benefit from such analysis and encourage the federal government to sponsor or otherwise catalyze this work.”
The other areas covered by the letter include:
- Solvency reserve accounts — PIAC supports these as a means of overcoming the procyclicality of pension funding requirements and to “mitigate the asymmetries regarding the potential for trapped surplus in plans.”
- Pension funding relief criteria — PIAC supports the federal government imposing criteria or conditions on individual companies seeking pension funding relief as part of a package of changes in “an effort to preserve the ongoing viability of the business;” and
- Clarifying benefit entitlement — PIAC supports clarifying the rules around benefit entitlement in a termination situation.
Though it wasn’t discussed in the government’s paper, PIAC also commented on legal discharge on annuitization. It suggests the federal government re-introduces the Pension Benefits Standards Act amendments ”that would allow for legal discharge of pension liabilities in the event of an approved annuitization by a federal plan,” stated the letter.