“Pension relief for corporations? Yes, but not without protecting the pensioners!

Past week’s papers were filled with articles on why Ottawa should be considering “pension relief” for corporations with underfunded pension plans. But most commentators missed the real story.  This is not about the impact on companies which are contractually responsible for the pensions; it is about the potentially devastating impact on pension plan beneficiaries- retirees! Pensions are deferred wages that were earned by beneficiaries over a lifetime of work. A mixture of lack of transparency, conflict of interest challenges, incompetence, poor governance, inadequate regulation, inappropriate investment practices and nonexistent/substandard pension insurance, conspired to lead to significantly underfunded plans that can potentially destroy the retirements for vast number of Canadians. I have some specific solutions that may go a long way to fix not just the current crisis, which is just a symptom of the underlying disease, a dysfunctional defined benefit pension system. But first let’s see how the press is reporting the crisis.

I have come across only Financial Post’s William Hanley (also appeared in the Ottawa Citizen) in “Even pension plans victim of the markets” who discusses the real issue, which is the potential impact on retirees should a company with an underfunded plan fail. (He, by the way, also quotes RetirementAction.com about the long list of problems with defined benefit pension plans that led to this crisis.) And, only CARP’s Susan Eng warned that such a move (i.e. the federal government providing contribution relief for companies) would put pensions even more at risk.”

McFarland and Perkins in Globe and Mail’s “’Disaster’ unless Ottawa offers pension relief” report that “Canadian companies are lobbying the Federal government for relief from their funding obligations” or else “they are facing possible financial devastation”. One anonymous executive is quoted as saying that if government doesn’t provide relief the result will be “fatally weakening companies that would otherwise have no financial problems.” (He must be joking. Sounds like blackmail. We have no financial problems, but if you don’t give us relief, we’ll declare bankruptcy and we won’t pay anyways.) Finance Minister Flaherty is reported to be considering relief for companies in “Ottawa weighing pension aid” .

Derek DeCloet in Globe’s “Pension system a disaster in the making (Mr. Flaherty, it’s time to fix pensions)” blames the government for the underfunding, because it prevents companies from contributing to pension plans once there is a “a surplus of 10%- you aren’t allowed to put another dime into it.” But the National Post’s Terence Corcoran puts the blame squarely at companies’ door steps for gambling away “other people’s pension fund values” in “Pension funds still gambling on stocks” He points to the use of imprudent investment strategies that likely imply that “the hidden risks in the pension industry are much greater than even the current crisis suggests.”

As far as solutions are concerned, the government should be considering immediate action. A good place to focus is not relief for corporations, though that should be included, but protection of beneficiaries’ pensions (their deferred wages). Here is a suggested list for immediate action by the government (at no taxpayer expense):

1. 1. Bankruptcy legislation: In case of bankruptcy of sponsoring corporation, pension underfunding must receive equal treatment with current employees’ wages (ahead of other creditors)

1. 2. Regulatory changes: (i) Annual solvency valuation and going concern valuation, (ii) regulated assumptions/parameters for going concern valuation, (iii) regulated parameters for commuted value (CV) calculation which protects remaining pension plan members, (iv) Asset-Liability management approach for all  <100% funded pension plans

1. 3. Governance: (i) 50% pensioner representation among plan trustees for all underfunded plans, (ii) plan advisors/consultants (actuaries, investment managers, etc) with explicit fiduciary responsibility to plan members (not to sponsor!)

1. 4. Pension Plan Portfolio/Investment Management: All underfunded pension plans to publish five year transition plan to Asset-Liability (ALM) matched portfolios. (Surplus assets, >100%, may be invested at sponsor discretion)

1. 5. Pension Insurance: Introduce in Canada and raise  in  Ontario pension insurance to $4,000/mo

1. 6. Company relief: (i)  increase from 5  to 7 years the period to make up the pension shortfall, (ii) remove restrictions and disincentives preventing companies from overfunding pension plans

1. 7. Pension for the next generation of Canadians: Introduce a pension plan along the lines recently tabled by Keith Ambachtsheer and the C.D. Howe Institute (CSPP- Canada Supplementary Pension Plan)

To provide contribution relief without addressing the underlying causes of the pension crisis would just delay the collapse of the house of cards with an eventual even larger impact on the affected pensioners.