Sponsors of DB pension plans with Ontario members will see their assessments under the Pension Benefits Guarantee Fund (PBGF) rise dramatically. Effective Jan. 1, 2012, the base fee per plan beneficiary rises from $1 to $5; the maximum fee per beneficiary in unfunded plans triples to $300, and the $4-million assessment cap per plan is gone.

These changes reflect the inadequacy of the existing fee assessments in this volatile economic environment. Even so, these increases are still unlikely to put the PBGF on sound footing. Hundreds of millions of taxpayer dollars have already been funnelled into the PBGF to deal with past insolvencies, and there is every reason to think it will happen again, sooner or later. Heaven help us if a jumbo plan with a deficit measuring in the billions ever fails. Such an outcome is not far-fetched.

Rather than trying to make the PBGF self-sufficient, why not eliminate it? It was instituted in 1980 when DB was far more prevalent and high interest rates meant that solvency liabilities were usually much lower than going-concern liabilities. Does this original rationale for the guarantee still make sense in the present environment? Fewer than 20% of private sector workers are covered under DB plans. Those DB members are still among the “haves” in our pension system—even when their pensions have to be reduced 20% or 30% on a plan windup. It seems unfair to expect the “have-nots” (i.e., the DC plan members and RRSP savers) to guarantee their pensions.

Is this too harsh? After all, no one wants to cut a retiree’s pension because of a company’s insolvency. But if we feel we have an obligation to protect DB retirees, why stop there? During the 2008 financial crisis, a number of retirees and near retirees who rely solely on DC plans and RRSPs saw their account balances decline by 20% or more. Coupled with lower prospective investment returns, their future retirement income may decline by an even greater percentage. This DC group has had to make do with diminished means by either postponing retirement, returning to work or curtailing their spending. For the most part, they have suffered quietly, even stoically; they did not march on Queen’s Park to pressure the government to restore their pensions. Since we cannot protect everyone, isn’t it better to stop protecting a privileged minority? The inequity of the current situation will be even more egregious once target benefit plans are implemented, since there will be even more employees exposed to reduced pensions when times are bad.

Doing away with the PBGF comes down to managing expectations. DB members have been led to expect that their pensions will be protected no matter what and have come to regard this protection as an entitlement. We can gradually move away from that by modifying how pensions are communicated. When DB members receive their annual pension statements, the portion of the pension that is actually funded on a solvency basis should be the number that is highlighted, with the message that the balance is payable only if the existing deficit is funded in full. This can be accompanied by more stringent restrictions on the granting of further benefit increases when the funded ratio of a plan falls below a given threshold. If these measures create pressure on employers to accelerate the funding of any deficits, that can be considered a good thing. Since we are creating a windup wish list here, grow-in benefits—which, to my knowledge, are found nowhere else in the world except Ontario and Nova Scotia—should also be phased out. Doing so will improve funded ratios on windup. A phase-out of both the PBGF and grow-in could take place over two or three years, during which time insolvencies will continue to be covered by the PBGF, possibly with a gradually declining maximum guaranteed amount.

No doubt eliminating the PBGF will face some resistance, but not from the general public who, by and large, do not benefit from that protection and should conceivably get a tax break. Labour groups might protest, but why should they, given that they also represent workers in multi-employer pension plans (and soon in target benefit plans) who do not get the benefit of the pension guarantee?

The alternative is to continue trying to make the PBGF work, knowing that a deficit from any large insolvency will have to be covered by taxpayers who do not have similar protection.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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The PBGF was not established by any pension expert and was a mistake which has contributed to more bad legislation and the reduction in the number of DB plans out there.

All reasons to kill it. It should also be noted that Ontario is the only jurisdiction which has one which eads to difficulites in standardising legislation across Canada. Another reason for not having a DB plan, if oen operates in various provinces.

Finally one could have reduced the impact of the PBGF and its liabilities by killing the one other piece of legislation unique to Ontario in the world which costs a fortune for limited value and again kills the DB plan and that is “grow in” rules. However in our enlightened world, instead of encouraging the DB progams we continue to kill them by enhancing grow in rules.

Only in Ontario, you say, Thank Goodness.

Tuesday, January 17 at 4:18 pm | Reply

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