In Quebec, how do pensioners and plan sponsors spell relief? R-É-G-I-E
As a result of the 2008 market plunge and the ensuing recession, defined benefit (DB) pension plans in Quebec are facing financial difficulties much like those in other jurisdictions. So it was no surprise that similar pressures led to similar solvency relief measures. However, a second glance reveals that the Quebec approach is distinct—and this distinction represents an innovation that could become a turning point in the endless debate about the security of pensioners.
The extension of the solvency amortization period from five to 10 years is one of the main temporary relief measures that have been implemented in most jurisdictions. It is also consistent with the temporary relief measures that were adopted just a few years ago in some jurisdictions and with recommendations made by many experts for permanent pension reform. To illustrate the impact of such a measure, basically, we can expect the solvency ratio to climb to 100% at half pace over 10 years versus over five years. For example, if a plan is now 90% solvent, three years from now, we can expect it to be approximately 93% solvent (not taking into account experience gains and losses) with a 10-year amortization period, versus 96% solvent with a five-year amortization period.
This may seem to be a minor difference. However, if we consider a plan that is only 60% solvent, which may be more typical today, then the comparison after three years becomes approximately 72% versus 84%—clearly, no longer a minor difference..
Conditions and Complications
In certain jurisdictions, such an extension is subject to one of the following conditions.
1. Consultation with, and consent from, active and retired plan members.
2. A guarantee consisting of the difference between the two amortization schedules, which will be covered by a letter of credit (LC) in case the plan is wound up in a deficit position and the plan sponsor is unable to pick up the tab.
Such conditions did not seem too rigorous in the last round of solvency relief a few years ago, when people were fairly confident that the financial strain would not produce severe long-lasting consequences. And, for those sponsors that took the LC route rather than consulting plan members, the banks were generally more receptive to their needs.
However, in today’s economic uncertainty and credit crunch, not only are banks charging a higher LC fee, they may not even be willing to offer such a guarantee—especially if the plan sponsor is in a sector that is more severely affected by the recession. Unfortunately, those are precisely the plan sponsors that need the relief the most.
Alternatively, if employers try to obtain the consent of plan members (whether explicit or tacit, depending on the jurisdiction), the active members or their union may be receptive, considering that such relief could help save their jobs. However, such a consideration is much less relevant to pensioners.
Why do some jurisdictions require consent? It’s mainly intended to protect retirees—and perhaps also to protect the authorities from irate retirees. Retirees may be comforted that the extension of the amortization schedule may ensure the plan sponsor’s—and therefore, the plan’s—survival. However, their main concern is that if the plan sponsor does not survive the economic downturn, extending this schedule may mean larger cutbacks to their DB pensions.