Pensions: Relief for companies, but not pensioners
Despite the fact that Canada’s financial institutions appear to be generally in better shape than American ones, some say due to more stringent regulation, even if that was true it sure doesn’t apply to protection of pensioners. Todd Wallack writes in the Boston Globe’s “Pension Plan Choices May Shrink” about the restriction placed on American retirees’ pensions when plans are underfunded. The most interesting contrast to Ontario/Canadian law is that companies with significantly underfunded plans were required to stop lump-sum payouts or were forbidden to make payouts in excess of “50% a benefit in a single payment”.. Nortel in U.S. was explicitly required to stop lump sum payments, whereas in Canada it continues to offer 86% level lump sum payments even though the plan is funded at about 60% level. (By the way, Johannus Poos, Nortel’s Global Pension Manager, revealed in Chapter 11 court documents that Nortel’s U.S. pension plan Assets are at 828M with a deficit 375M (not sure if this was going concern or wind-up valuation, though I assume the latter. When is the Court or the Regulator (FSCO) or the Government going order a valuation of the Canadian plan? It is truly amazing the difference in protection offered to pensioners in the U.S. compared to Canada!) The good news on pensions in the Ontario Budget 2009 is that pensions are mentioned in the Budget. The bad news is that with exception of adding some meat on the bones of the previously announced solvency relief for companies with underfunded pensions, there is nothing specific to help pensioners feel more secure (It is of no value for pensioners when the company is already under CCAA protection and for others, the criterion for single employer DB plans providing 10 rather than 5 years time to make up the shortfall is gated by 1/3 of plan beneficiaries not opposing it; of course since pensioners and deferred pensioners don’t have lists of beneficiaries, how are they going to help muster the required numbers should they wish to oppose the extension?). Other pension related budget items were less specific and more directional in nature, promising legislative changes in the fall 2009 (an eternity for Nortel pensioners) pertaining to: phased retirement, new powers for the Superintendent of Financial Services and follow-up to last year’s OECP recommendations. There was also mention of plans for a Pension Reform Advisory Council, a review of actuarial standards for improved pension funding and other potentially high value activities, but there was insufficient detail on content or timing to be able to assess if anything on this list will have any near-term beneficial effect in turning around the ongoing destruction of Ontario private pension system. By the way, if you are interested in my initial thoughts on pension relief when it was first floated last fall, you can read “Pension relief for corporations? Yes, but not without protecting the pensioners!” Also, you really should read the pension section in the budget together with McNeill and Sorhaitz’s “Solvency relief: It IS rocket science” in BenefitsCanada. Some of their ideas are a breath of fresh air, especially after reading some of the actuarial fiction that I am used to reading. (e.g. Nortel Actuarial Valuation Report last prepared for year 2006, which many would argue were based on aggressive assumptions resulting in highly optimistic funding status when issued in 2007 and are certainly of zero value today). The authors’ assessment of solvency relief plan (before they saw the official release of the budget, was as follows. “The net effect of current solvency relief measures for defined benefit pension plans facing funding deficits largely defeats the purpose of solvency funding, and casts aside the rules at the moment of greatest need. If a company is financially strong and survives long-term, or if equity markets recover, then that’s no big deal. But what about the company that faces failure in the short-term, or if equity markets continue to fall?” For the case of companies at risk of insolvency, the ones where the solvency rules were designed for in the first place, it is essentially useless. Instead they propose a “more robust funding framework.” The elements of the framework (and this is a breath of fresh air) include: (1) enforce fiduciary duties to plan beneficiaries, (2) restrict contribution holidays and increase excess contribution ceiling to 20%, (3) use financial strength test to determine the suitability of solvency relief in light of the circumstances of the company and need to protect plan beneficiaries. For companies in danger of insolvency, they suggest a model based on U.S. Chapter 11 insolvency protection (Note: Canada/Ontario trailing the U.S. in protection of pensioners, in this area as well, not just pension guarantees and new approaches to next generation pension plans.) Such ‘high risk’ companies can qualify for relief in terms of reduction of plan benefits to levels affordable by plan assets if certain conditions apply, including: “Unencumbered assets would have to be pledged to the plan and not used to prop up the company.” And “There would be no return to shareholders (i.e. dividends or share buy-backs) until compliance with solvency funding is restored. Reasonable remuneration would be exempt from this condition.” And “Pension trust fund assets would be invested fully in bonds”. I suspect that the model is not fully compatible with the dismal protection that Canadian pensioners get compared to that available in the U.S. with PBGF (which protects pensions up to about $54,000 per year), so some of the reduced benefit relief referred to may not be acceptable in Canada, unless accompanied by other guarantees. However the seeds for a solution are there and it is not solvency relief for companies about to go into or already under bankruptcy protection.