Occupational pension plans, which can be
defined benefit or defined contribution plans, were also mentioned by
witnesses. A number of concerns about defined benefit plans in particular were
shared with the Committee, especially regarding the solvency and funding of
such plans, ownership of any pension surplus, and protection for employees when
the employer that sponsors the plan becomes insolvent or experiences financial
difficulty.
Figure 5: Registered Pension Plan Membership,
by Type of Plan, Canada, 2009 (%)
Source: Statistics Canada, CANSIM Table 280-0016.
Ms. Judy Cameron, of the Office of the
Superintendent of Financial Institutions (OSFI), commented that pension plan
assets of federally regulated occupational pension plans were eroded by stock
market declines in autumn 2008 while pension liabilities increased due to
extremely low and declining long-term interest rates that reduced the predicted
return on investment. She told the Committee that, due to stock market
improvements in 2009, the average solvency ratio increased from 0.85 at
December 2008 to 0.90 at December 2009, and 40% of federally regulated private
pension plans had a solvency ratio of less than 0.80 at the end of 2008, a
proportion which had fallen to 15% at the end of 2009.
Solvency issues were also addressed by Mr.
Rock Lefebvre, of the Certified General Accountants Association of Canada, who
shared preliminary analysis of the 2008 year-end results; these results
revealed a $300-billion funding deficit for all private-sector defined benefit
pension plans. He urged the creation of a target solvency margin related to the
risks associated with a pension plan’s assets and liabilities. Mr. John Farrell,
of Federally Regulated Employers—Transportation and Communications (FETCO),
stated that defined benefit plan sponsors are burdened with onerous and
volatile solvency funding requirements, and Mr. Serge Charbonneau, of the
Canadian Institute of Actuaries, pointed out that Crown corporations do not
have a bankruptcy risk and thus should not be required to adhere to solvency
rules.
The Public Service Alliance of Canada’s Ms.
Patty Ducharme told the Committee about the November 2009 actuarial report of
the Chief Actuary, which found that the pension plan for federal public service
employees had an actuarial surplus. She noted that employee contribution rates
are projected to increase by approximately 60% from 2005 to 2013 in order to
increase the ratio of employee-to-employer contributions.
Mr. Farrell noted that the majority of FETCO
members sponsor defined benefit pension plans, and urged modernization of
pension standards in order to support the viability of existing defined benefit
plans by enabling plan sponsors to continue to manage risks. He told the
Committee that FETCO generally supports the fall 2009 changes to the Pension
Benefits Standards Act, 1985, but indicated that permanent changes in
pension plan funding rules are needed, such as more frequent actuarial
valuations and more adequate reserves for lower future investment returns.
The Rotman International Centre for Pension
Management’s Mr. Keith Ambachtsheer, who appeared on his own behalf,
commented that—originally—defined benefit pension plans were seen by the
employer and employees as a gratuity; this gratuity is now seen as a financial
contract between the employer and plan members. Mr. Pierre St-Michel, who
appeared on his own behalf, reinforced the fact that a pension is a contract when
he said that pension deficits are really a subsidy from the employee to the
employer, since promised benefits are reduced. In highlighting the situation
that now exists in the Netherlands, Mr. Ambachtsheer proposed that defined
benefit pension plans should be regulated in a manner similar to banks and
insurance companies: risk on a balance sheet must have adequate buffers against
adverse outcomes. Ms. Cameron suggested that effective plan governance is
important in controlling risk, and suggested that regular “scenario testing” or
revaluation of current assets and future liabilities using various market
outcomes could help pension plan administrators understand, and prepare for,
future risk.
Mercer’s Mr. Malcolm Hamilton, who appeared
on his own behalf, told the Committee that one of the problems with defined
benefit pension plan rules is that employers that over-contribute in order to
create a reserve for lower future investment returns may not be fully entitled
to the surplus if the reserve is not eventually required. The Organisation for
Economic Co-operation and Development’s Mr. Edward Whitehouse, who appeared on
his own behalf, indicated that the current rules on over-contributions were
introduced when investment returns were high and tax authorities were concerned
about the sheltering of business income from taxation through contributions to
the pension plan. In the view of Mr. Lefebvre, clarification is needed about
the ownership and distribution of pension surpluses on plan termination.
Mr. Ambachtsheer noted that the issue of
pension surplus ownership is a property rights problem which could be resolved
through individual pension accounts that are owned by the employees. Mr.
Charbonneau advocated the creation of a pension security trust that would be
separate from, but complementary to, a defined benefit pension fund. In his
model, the employer would own the funds in the pension security trust, receive
a tax deduction for contributions and be taxed on withdrawals.
Regarding creditor status in relation to
pension plan actuarial deficits, Ms. Diane Urquhart, Ms. Diane
Contant Blanchard, Mr. Tony Wacheski, Ms. Gladys Comeau, Mr. Paul
Hanrieder and Mr. Pierre St-Michel, who appeared before the Committee on their
own behalf, as well as Mr. Donald Sproule of the Nortel Retirees’ and Former
Employees’ Protection Committee, Mr. Robert Farmer of the Bell Pensioners'
Group, Mr. Phil Benson of Teamsters Canada and Mr. Gaston Fréchette of the
Association des retraités d'Asbestos Inc., advocated higher priority for
pension deficits in the event of employer insolvency. Mr. Hanrieder suggested
that changes to the priority of pension deficits during bankruptcy should apply
to current bankruptcy proceedings of bankrupt employers. Mr. Sylvain de
Margerie and Ms. Josée Marin, both appearing on their own behalf, proposed that
unregulated pension plans for those on long-term disability should be granted
higher priority during bankruptcy proceedings.
Mr. Farrell was concerned that granting higher
priority to pension deficits would erode the savings of individuals without
defined benefit pension plans, since various types of private investments hold
corporate bonds that could be affected by the suggested priority change. He
also argued that higher priority for pension deficits would place companies
that offer defined benefit plans at a competitive disadvantage in relation to
Canadian companies that do not offer such plans and in relation to international
companies that are located in jurisdictions without such a super-priority
status. In addition, he argued that—with the suggested change—credit ratings
for companies that sponsor defined benefit plans could be reduced due to the
potential liability associated with a pension plan deficit; a lower credit
rating could increase the cost of capital.
Mr. Hamilton commented that higher priority for
pension deficits could result in conditional loans to corporations in the sense
that the terms of the loan could enable changes to be made if the company
introduced, or improved the benefits of, a defined benefit pension plan. Mr. Michel
Benoit, legal counsel to certain federally regulated private-sector employers,
stated that higher priority for pension deficits would increase the cost of
credit for employers; in his view, the best protection for pension plan members
is a financially sound employer. Ms. Melanie Johannink, who appeared on her own
behalf, told the Committee that, in Australia, the increased cost of credit for
employers was minimal after bankruptcy laws were changed to grant employer pension
plan contributions a priority status above unsecured creditors. Mr.
Ambachtsheer commented that most corporations have closed their defined benefit
pension plans to new employees and that changes to bankruptcy laws would only
have an effect during the winding up of existing plans and would not protect
future employees.
Mr. Charbonneau advocated changes that would
decrease the costs associated with annuities; in particular, during the winding
up of a pension plan, annuity purchases could be spread out over time rather
than purchased at the same time for all retirees. Ms. Norma Nielson, who
appeared on her own behalf, told the Committee that a possible solution for a
plan whose sponsor is bankrupt is to have the Canada Pension Plan Investment
Board assume administration of the plan’s investments. Mr. Donald Raymond, of
the Canada Pension Plan Investment Board, indicated that such a role is not
part of the Board’s current legislated mandate, and additional infrastructure
would be required to ensure that the funds associated with the plans sponsored
by insolvent employers would be segregated from the Canada Pension Plan’s
assets.
In addition to a change in priority status,
witnesses provided other suggestions in relation to pension protection in the
event of employer insolvency. For example, Mr. Serge Cadieux, of the
Canadian Office and Professional Employees Union, supported an insurance fund
for defined benefit pension plans; according to his proposal, such a fund
should be financed by premiums paid by all sponsors of defined benefit pension
plans as well as by a new tax on financial transactions cleared and settled by
a securities exchange.
Ms. Katherine Thompson, of the Canadian Union
of Public Employees, Mr. Réjean Bellemare, of the Fédération des
travailleurs et travailleuses du Québec, and Ms. Ducharme supported the
creation of a federally sponsored pension insurance program funded through
premiums paid by all defined benefit plan sponsors. Mr. Joel Harden,
of the Canadian Labour Congress, advocated an insurance premium of $2.50 per
plan member to a maximum of $12 million per year per pension plan, while Mr. Bellemare
supported a premium based on the investment risk of a particular pension plan.
The notion of an insurance scheme for
bankrupt pension plan sponsors was not supported by Mr. Whitehouse or by Mr. Ambachtsheer, who held the view that the schemes have not worked in other
countries. Mr. Ian Markham, of FETCO, also did not support a national insurance
fund since, in his view, well-run pension plans would be subsidizing plans with
more investment risk.