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Why Canada’s pension funding regime needs an overhaul

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Still missing the forest for the trees. Solvency funding was the first funding relief initiative, moving form experience deficiencies.

Two items created about the same time and since extended cretaed the probllem and the solutions suggested add complexity and do not solve the problem.

The first was “grow in” rules. This was created to be severance payments for plans being wound up and created massive liabilities for plans with early retirement incentives. If never implemented, the funding of plans would be much better and many more plans would have met thier obligations on closing.
Rather than deal with “grow in”, the proposal would be that on termination, benefits to individuals could be reduced to funded level as they do in the UK.

Second we get to accounting rules which introduced best guess and more agressive assumptions, in the ealry 90’s we kept saying interest rates could not continue to go down, the regulators said we will accept the plan sponsors documents as long as they signed them.
So we saw as interest rates dropped from double digits to 4% we sawaccounting assumptions remained high and thus pensions did not cost much, we saw on-going valuations stay well above market rates because do drop them would require greater contributions.

So since pensions cost less than pay raises, we still found it easier to give away increases in pensions to satisfy the aging population.

Now that we have to pay, the solution is to find a means to temper the problem we created for the few DB plans that will remain.

Unfortunately in Ontario, the few who remain or the rest of the population will still have to pay for the Guarantee Fund, another error created by non pension folks.

It shoudl also be recognised that all these were considered and rejected in the Haley report in the 70’s.

But then again let us just assume that the easy answer is that because it was done years ago a review is needed because it is outdated.
One should truly identify what went wrong and fix that rather than trying to work around the problem.

Thursday, January 29 at 6:58 am | Reply

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