Reforms tweak DB pensions but may push more employers to DC plans; do little to help those with no plans at all
While Ottawa's five-pronged
proposed reform of the pension system is welcome as far as it goes, the focus
is mostly on enhancing benefit security for the fortunate few who are already
in employer-sponsored Defined Benefit pension plans.
There's no mention of new
savings vehicles for the 75% of private-sector workers who don't have
traditional DB pensions, says CARP advocacy vice president Susan Eng [pictured left].
Nor do the proposed measures directly address
the problems of under-funded pensions from bankrupt employers. It was the plight
of pensioners at troubled firms like Nortel Networks and Air Canada that moved CARP to push for a Universal
Pension Plan that would piggyback off the Canada Pension Plan, to which most
workers contribute.
Liberal leader Michael
Ignatieff is floating a similar scheme of a supplementary savings plan tied to
the CPP, although his party has yet to unveil a formal pension platform. An alternative supplementary plan which
would be voluntary and Defined Contribution in nature has been proposed by
Keith Ambachtsheer of KPA Advisory Services.
The Canadian Labor
Congress has even proposed a doubling of CPP benefits phased over the next 17
years. The CPP currently pays a maximum of $908 a month or $11,000 a year. On
top of that, whether you were in the workforce or not, most Canadians will also
qualify for Old Age Security benefits when they turn 65, with the poorest
seniors also getting the Guaranteed Income Supplement.
The new proposals say nothing about increasing tax-sheltered room for RRSPs or the new Tax Free Savings Accounts. As anyone will realize who waded through the somewhat abbreviated backgrounder in today's earlier blog post, the focus was almost entirely on seemingly obscure changes to DB plans.
Still, esoteric as they may
seem, it's a step in the right direction to tweak existing corporate DB
pensions and important to those who are affected. 
Ian Markham, director of
pension innovation at Watson Wyatt Canada says Finance Minister Jim Flaherty's
reforms are "clearly aimed at enhancing benefit security, which DB plan members
do need."
Loss of control could push
more firms to DC plans
But Markham [pictured, right] is worried the proposed changes will "be regarded as quite imbalanced
by large and small private sector DB plan sponsors, who are increasingly
worried that their pension plan finances in future years will swamp their
company results."
Such a loss of
control hurts their ability to plan for future capital investment and could
push them towards Defined Contribution plans, Markham says. While there were some
mentions of DC plans, the government's proposals are "not focused on the DC
side."
Furthermore,
because the proposals mainly address federally regulated plans, it doesn't
directly impact Nortel, which is provincially regulated.
Progress for distressed plans in severe financial difficulty
However, under
principal three – Resolution of plan-specific problems – there is "generally
good news" on so-called workout schemes for distressed federally regulated
pensions where the sponsor is in severe financial difficulty. This provides more flexible rules so
plan members and plan sponsors can negotiate amicable resolutions. This is
something Air Canada did last week, when it got a two-year moratorium on
amortization payments for pensions and agreed on a way to boost funding over
the following three years.
Markham feels the
new measures "don't provide a particularly strong solution to the funding
volatility plan sponsors are facing." There were industry demands for "somewhat
more" than has been offered under the Flaherty plan. These included a 10-year permanent
amortization of solvency deficits instead of five, and the ability to do triannual valuations
instead of the annual ones now proposed. And they've been given the ability to
use properly structured lines of credit to cover solvency payments. "A year ago
that wouldn't have helped because you couldn't get credit. Now they would see
that as more of an advantage."
But the devil is
in the details, Markham says. "They don't actually say how a surplus will be
treated in a partial windup. There are things that are unclear and that will
have to be fleshed out in the coming months. There are unanswered questions
such as what happens to surpluses when a company is split in two."
The Superintendent can still declare a partial wind-up. Markham says sponsors were willing to grant immediate vesting in order to get that ability eliminated "and they will not be happy about this outcome."
Urgency was appropriate but reform must be comprehensive, not piecemeal
While it seems that the government rushed these proposals out with unseemly haste, Eng says she "supports the urgency. I don't know if this will be enough to cover all the issues people have raised or if it will upset the balance in relation to other issues. I'm cautious because it needs to be part of a comprehensive package rather than piecemeal."
Eng says you can't just deal with those who already have pensions and forget about those with none and there's precious little to help those earning low wages. "The only way to help them is to increase OAS and GIS."
–62–
Posted in
