There is a growing chorus of calls for the reform of Canada’s system of private pension plans, after some corporate plan sponsors suggested they may face bankruptcy unless solvency rules are eased.
Many private pension plans are facing massive solvency shortfalls, due to horrendous losses in their equity portfolios. Come year-end, these companies will be forced to disclose the health of their pension plans.
With the employer on the hook to make up any shortfall in defined benefit plans, the disclosure of a large enough deficit could see a sell-off in the company’s stock, according to Jacques Lafrance, member of the board of directors for the Canadian Institute of Actuaries (CIA).
“Under federal pension regulation, there is a rule that if your plan is underfunded, you must file every year, a new actuarial valuation with the federal government,” he says. “The concern for these companies is that when they file their valuation, it will reveal a significant increase in their deficit and a huge increase in the contributions they will have to make.”
Lafrance estimates that more than 70% of pensions are likely underfunded at this point.
Given the tightness of the credit market, many companies would struggle to secure the required financing through traditional channels. The CIA has suggested that the federal government could backstop the pensions of federally regulated companies, including banks, airlines and communications firms.
“If the employer goes bankrupt and there is a deficit in the pension plan, the benefits of all plan members will be reduced, including retirees,” he says. “If you know that your employer or former employer is in a shaky position, there is a risk that if your employer goes bankrupt, your pension benefit will be reduced.”
Private pensions are typically considered the cornerstone of retirement planning for those who have them, with government benefits and RRSPs rounding out the retirees’ income to allow for an improved lifestyle.
“If you are a politician, you need to be aware of this risk,” says Lafrance. “If you don’t do anything, the current situation may precipitate bankruptcies.”
The CIA is not pushing for any single solution, but says the government needs to take a multi-pronged approach. Perhaps most helpful would be the provision of letters of credit, which would serve as loan guarantees to allow the plan sponsors to borrow enough to top up their pension.
If the government shored up the pension system, it would not only help to maintain benefit payments to current retirees, but it would also safeguard both the jobs and pensions of current employees.
There is a lobbying effort underway, asking the federal government to suspend the requirement that employers top up their plans immediately. The rationale behind this request is that some of the current shortfall will be reversed when equity markets eventually rebound.
CARP, Canada’s Association for the Fifty-Plus, is opposed to any suspension of the requirement that employers top up their plans.
“This is the opposite of what pensioners have demanded. Now their pensions are even more at risk,” said Susan Eng, vice-president, advocacy, of CARP, in a press release on Wednesday.
The lobby group insists that plan sponsors should be required to set aside contingency funds during positive market conditions, to make up for shortfalls in rough times. Instituting such a rule may have longer-term benefits, but would do little to ameliorate the current problem.
Filed by Steven Lamb, Advisor.ca, email@example.com