WE HAVE WEATHERED THE RECENT CRISIS IN PENSION plan funding after the collapse of equity prices in 2000. But there are challenges ahead. Plans are still underfunded, and the current investment climate continues to have low interest rates and unstable equity prices. Funds have been taking on additional risk to boost yields. Members are uneasy about the security of their benefits. Class-action litigation has increased. As they make new year’s resolutions, trustees and administrators should focus on managing those risks and plan against uncertainty.

To do so, trustees and administrators— particularly at multi-employer plans—need to know what the risks are and how to insure against them, which insurance to obtain, and how to control insurance costs. At this crucial time, it is difficult to obtain insurance coverage for reasonable premiums. Insurers are not finding it economical to provide the levels of coverage many trustees and administrators would otherwise want— particularly fiduciary insurance.

COST CONTROL
Thankfully, there is action that trustees, administrators and their advisors can take to reduce risks and control costs. The first step is to identify their coverage and risk exposure. Multi-employer plans have different risks than single-employer plans; health and welfare plans have different risks than pension benefit plans. Trustees and administrators should therefore audit their insurance coverage, related indemnities and basic activities. Many know they have some sort of insurance, but are unaware of how the products integrate with their activities, the plan text and the law.

There are also steps that trustees and plan administrators should take as part of any prudent administration of a plan. They should require advisors to carry adequate insurance, require disclosure of any limits on advisor’s insurance, including any exclusions on insurance coverage. For example, some professional insurance explicitly limits or excludes liability for services to pension and benefits plans.

As a result, trustees and administrators should review indemnifications in trust agreements and plan texts, and integrate these provisions with the available insurance product. Savings can be achieved where there is overlap or double-coverage between indemnifications under the plan and under insurance contracts. Tailoring a more efficient solution may involve a modified insurance product to fit the needs of a particular fund. For example, a health and welfare fund will have different needs than a pension benefit fund.

There are also precautions we should be taking as an industry to ensure stability in our future pension system, such as examining the experience of other jurisdictions and discussing the possibility of a made-in-Canada solution to the lack of insurance. The insurance shortage is a classic case of market failure, and requires a co-ordinated solution, such as a national pension protection insurance scheme.

In Canada, we have a patchwork regulation of pension funds. For one, Ontario has a public insurance system, the Pension Benefits Guarantee Fund(PBGF), which is a good start, but woefully underfunded and subject to exclusions, such as multi-employer plans. One large insolvency could exhaust the fund.

The same problem has arisen in other jurisdictions. The equivalent of the PBGF in the U.S., the Pension Benefit Guaranty Corp., is under pressure due to the reorganizations of the airline and steel industries. In the U.K., pension law reforms, including a public insurance scheme, have become a centrepiece of the Blair government’s agenda. In an era of plan underfunding and rising benefits costs, there is significant support among unions, employers and industry groups for a coordinated, public solution to the lack of adequate insurance for pension plans.

The devil is, of course, in the details, and each jurisdiction will favour a variation on the theme. Proposals are required, as is discussion among stakeholders. Planning for and paying for insurance is not often done gladly—until we need it most.

Simon Archer is an associate with Cavalluzzo Hayes Shilton McIntyre & Cornish LLP in Toronto. sarcher@cavalluzzo.com

 

Copyright © 2019 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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