Themes and Variations

Temporary Funding Relief
Funding relief was one area with tangible progress. The poor funded status of pension plans dominated headlines early in 2009. For the second time this decade, Canadian businesses felt compelled to lobby for relief against the huge cash infusions that their pension plans required. Governments responded quickly, with proposals coming forth as early as November 2008 and continuing into 2009.

The main thrust of this wave of funding relief was to defer the funding of solvency deficits through a variety of measures, including the extension of the amortization period to 10 years from five, consolidation and re-amortization of existing amortization, and an outright moratorium on solvency special payments for up to three years.

While many of the measures were welcome, their true effectiveness was dampened in jurisdictions that required either plan member buy-in or financial backstopping through a letter of credit. However, the industry has learned three important lessons from this funding relief exercise.

Fragmented regulation causes problems – The wide variety of measures adopted reinforced the primary problem with Canada’s private pension system: too many regulators and not enough agreement on how to address critical issues.

Viable funding alternatives are needed – The current funding regime for DB plans of going concern and solvency valuations has failed to deliver financial security for pensions, and the time is ripe to consider alternatives.

Broader risk management strategies are critical – While asset mix may be the key to successful investment returns long term, the typical 60/40 pension fund asset mix strategy does little to protect plans against “once-in-a-lifetime” events that seem to be happening on a more regular basis.

Pension Standards Reform
The year also saw continued activity from the four pension standards reviews taking place. Ontario, which released its report in November 2008, announced the creation of a new Advisory Council on Pensions and Retirement Income in July 2009, with a mandate until March 2011. Alberta and British Columbia also released their report in November 2008, followed by legislation in B.C. in 2009 paving the way for the ABC Pension Plan, a new universal pension. Nova Scotia released its report in January 2009, but nothing further has occurred. The federal government revealed several initiatives in October 2009 but provided no time frame for implementation.

While the level and direction of this activity is encouraging, there are still some major concerns with specific issues:

Surplus – This is the core issue as far as the private pension system in Canada is concerned. There can be no effective pension regulatory environment without clarity in pension standards on the issue of ownership and use of pension surplus. Continued reliance on the courts to define this issue is not the answer.

Funding – While the temporary funding relief measures have provided some assistance, the whole funding regime needs review.

Plan design – There seems to be universal acceptance of the need for a wider range of acceptable plan designs. Traditional DB and defined contribution plans both have major limitations. With the growing interest to expand the use of target benefit plans, where the benefits can be restricted to the assets available, it would be unfortunate if these were restricted to collectively bargained situations.

Financial Challenges and Guarantees
In 2009, we saw the compounding impact of a poor economy and fragile markets, with companies in financial difficulty struggling with pension plans that were also in financial difficulty. While there is no easy way to track the number of pension plans that were terminated because plan sponsors went out of business or could no longer afford them, two broader questions come to the forefront, highlighted by high-profile corporate cases.

1) Should governments (i.e., taxpayers) backstop underfunded pension plans?
The North American auto sector was beleaguered by the economic downturn. Its cash requirements were huge, and one of the drains on the cash was its pension deficits. GM Canada’s situation caught much media attention, as it was also in the midst of negotiating a new collective agreement.

There was significant public opposition to using tax dollars to top up the underfunded pension plans of distressed companies. The main arguments against such action were that the majority of private sector taxpayers aren’t in pension plans, that taxpayers aren’t topping up the 2008 RRSP losses of individuals and that while the pension plans may have been under water, no one was going to lose their entire pension benefit.

Ontario, with its Pension Benefits Guarantee Fund, is the only jurisdiction that has a pension insurance scheme. However, the financial viability of that program is questionable, and it would take the collapse of only one jumbo plan to bankrupt it.

2) Should pension plans get priority in bankruptcy proceedings?
As a case in point, Nortel entered bankruptcy protection in 2009, leaving its former employees with an underfunded pension plan. This led to protests on Parliament Hill. The pensioners joined the ranks of unsecured creditors, with low hopes of securing funds out of the restructuring and sell-off of Nortel assets. This issue has caught the attention of at least one of the opposition parties in Parliament and is still in play.

Pension Coverage
The lack of pension plan coverage in the private sector and the low level of retirement savings of Canadians in general are arguably the most important retirement-related issues in Canada today. These issues finally caught the attention of our politicians and have begun to dominate the pension debate.

Many solutions have been proposed, including expanding the current C/QPP program, expanding the Old Age Security/Guaranteed Income Supplement, offering broad-based supplemental plans on a national or regional basis (making it easier to establish multi-employer plans among non-related entities) and establishing super investment funds that plans could buy into.

Much is at stake—not only for the retirement security of Canadians, but also for the business models of many of the current players in the retirement savings space. With an aging population of baby boomers, there’s no time to dither. Wherever we end up, it will be critical that the adopted solution be completely aligned with the needs and benefits of those participating in the program.

Views on 2010
While many of the signs coming out of 2009 appear positive, the world economy remains under stress, leaving us to approach the new year cautiously and look ahead to what’s on the horizon.

Coverage – This is likely the area with the greatest prospects for positive action. While national solutions are preferred, Alberta and B.C. may be willing to move forward if others aren’t. Success will depend on a champion (or champions) stepping forward and taking up the cause.

Pension reform – For many employers, whatever comes may be too little, too late. If the system isn’t reformed soon, then the U.S. trend to freeze and completely eliminate DB liabilities will find greater traction in Canada.

Pension accounting – Most company balance sheets were spared the full impact of the poor markets in 2008 by an abnormally large spread between yields on corporate AA bonds and those of Government of Canada bonds. With the reversal of this anomaly in 2009, companies are seeing increases in both their pension expense and their disclosed pension liabilities. Furthermore, the impact of the adoption of the International Financial Reporting Standards for 2011 on pension plan design decisions remains unclear.

Risk management and sustainability – There is limited appetite from plan sponsors to go through another experience like 2008. Risk management will be at the top of pension committee agendas, with de-risking being added to the pension lexicon. Also, recent years have caused some to wonder whether or not existing DB plans are sustainable for the long term at contribution levels that their sponsors can afford.

While 2009 was one of the busiest years ever for pensions, it was still a transition year with not much resolved. With a more visibly concerted effort by all stakeholders, 2010 has the potential to be a transformative and defining year for pensions in Canada.

Barry Gros is vice-president with Aon Consulting.
barry.gros@aon.ca


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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the January 2010 edition of BENEFITS CANADA magazine.