- Consulting with Canadians -

The Canadian National Pensioners Association's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:

September 7, 2005

Surplus

The Canadian National Pensioners Association (CNPA), which represents approximately

43, 000 pensioners and survivors, appreciate the Government’s efforts and promise to more proactively identify Pension plans that pose higher levels of risk and ensure that plan administrators take prompt corrective action where needed. If this had been done in the past, perhaps we would not have the deficits we have today.

The members of the CNPA have a strong interest in your document and research, as we are members of a Defined Pension Plan. The majority of Canadians spend their working lives looking forward to a good retirement with dignity, security, and adequate income security. The CNPA believe employers have an obligation to provide adequate pension plans to their employees, over and above the requirements of the public system. If Canadians are unable to secure adequate private pensions they will be forced to pressure the Government to improve the public pension plans, particularly the Canada Pension Plan (QPP) with employer involvement.

We should be reinforcing support for the general value and effectiveness of Defined Benefit Pension Plans and the need for government to maintain a sustainable Defined Benefits system (rather than allowing Defined Benefits plans to gradually disappear). In this respect, more funding should be available to pension regulators (like OSFI and its provincial equivalents), so that they can perform their functions more effectively, as they play a very important role in looking out for pension plan members' interests.

The CNPA agree that the number one goal of PBSA must always be to set out higher minimum standards for federally registered pension plans and to maintain them to ensure that the rights and interests of pension plan members, retirees, and their beneficiaries are protected. The rights and interests of Pensioners in all pension plans should have priority protection ahead of all other creditors. Legislation must be put in place that ensures that Pension Funds are secure and available for the purpose for which they were intended. When a Pensioner reaches retirement, he or she has been assured they could live out their lives with a promised income they earned for many years of faithful service to the Company. As well, these Pensioners should never be penalized because of future changes in Company philosophy or ineffective management. The CNPA believes that legislation should be passed to ensure Pension Funds are exempt from creditors in the event of corporate bankruptcy. One way to protect the pension benefits from creditors of an employer would be to segregate the assets of the Trust Fund that relate to pensioners so that they could not be used for any other purpose. The regulatory framework for pension plans must ensure that they remain effective and responsive to changing market conditions, making their security and viability dependable and secure even in the worst of times. Legislation should also be passed to provide protection of Pension Plans when corporate headquarters move outside of Canada.

In recent years, there have been growing concerns that Defined Benefit Pension Plans have had to deal with two major obstacles, namely adverse market conditions and funding deficits. They are linked together and they should not be. We do not believe that when the first Defined Benefit Pension Plans were negotiated that they were meant to rely on investments to keep viable. A Defined Benefit Pension Plan is usually a negotiated benefit; in most cases, where the company involved and employees are supposed to pay the cost of maintaining the plan. If both sides faithfully fulfill their commitments, then how then do deficits arise? The answer lies in the trend of companies relying too heavily on investments for funding. As mentioned in the Government Document, Defined Benefit Pension Plans in other countries are facing similar challenges and they too are looking to develop long-term pension reform proposals. We must remember that they may have different ideas that are not necessarily the best for Canadians. We must develop our own long-term Canadian pension plan reform proposals and we certainly have the manpower, initiatives and ability to do so.

Your document states "Many plan sponsors and pension experts have argued that there may be an "apparent" asymmetry in surplus ownership under the PBSA. They argue that, in the absence of contractual clarity, the PBSA has the effect of requiring the plan sponsors to share any surplus while remaining fully responsible for pension plan deficits.  There is also the uncertainty of surplus distribution during partial termination, where the surplus is notional, until the full termination of the plan.  As a result, plan sponsors claim that they are discouraged from contributing more than the required minimum."  The CNPA see this as a smoke screen as again these items could be clarified quite quickly and easily or even negotiated between the employees and employer.

As stated, the PBSA provides for minimum funding requirements allowing the Pension Plans that fund above the minimum to improve the stability of pension contributions over the business cycle, by building up a cushion against market shocks and relieving funding pressure on sponsoring companies during economic downturns and periods of poor market returns. The CNPA believe that if full funding requirements were put in place at all times there would be minimal problems during economic downturns and periods of poor market returns.

The document states that some members of PBSA registered plans have argued that pension benefits are deferred compensation, paid as a consequence of contract negotiations that would otherwise have been paid in another form. They are, and our Pension Plan is one of them. It states that plan members bear some risk of not obtaining fully promised benefits and may be exposed to increased contributions, reduced benefits, or wage concessions as a result of the sponsor being forced to fund its pension deficits.  In this context, it is argued that plan members ought to have a claim to the surplus. This statement again could be called nothing but a smoke screen or a scare tactic hiding the real problem. If the Pension fund were properly funded it would eliminate the need to fund a Deficit or have little effect the benefits of the plan. The CNPA feel that any of the Employees’ contributions invested and showing surplus profits belong to the Pensioners.

The CNPA agree with the Quebec Supplemental Pension Plan Act, which instead of providing for partial terminations, requires immediate vesting of pension benefits for all plan members. This ensures that fair treatment, which is provided under the PBSA to affected members of partial plan terminations, is given to all plan members that terminate employment.

The proposed funding changes due to challenges that are being experienced because of disclosure and solvency funding requirements, and proposed increases to maximum allowable surplus limits under tax and pension rules should be studied very carefully before being revised. If applied properly, higher maximum allowable surplus limits under tax and pension rules could be beneficial for both the company and to the Pension Plan.

Funding

The proposal to help address solvency funding issues by amending the PBSR to permit letters of credit with certain characteristics to be recognized as pension assets in solvency valuations has many weaknesses. What are the characteristics to be recognized that would make a letter of credit sound? Solid cash or solid investments prevent deficits, not more paper work. A letter of credit is of little use if a company runs into financial problems and cannot meet its obligations further down the line. Again, the Pensioners could become the losers. Would appropriate terms and conditions really ensure the protection of pension benefits? We doubt it. The use of letters of credit as a proportion of total assets required for solvency funding purposes should be very limited and used for a short duration only to keep a company solvent if necessary. The plan sponsor should withdraw Letters of Credit as soon as possible if a solvency surplus emerges.

The statement, "If letters of credit could be withdrawn, this could provide additional flexibility to plan sponsors to respond in the event that market conditions continue to improve and long-term interest rates increase.", once again shows how much the plans have come to rely on the market and investments to keep the Pension Plan viable. Again, The CNPA do not believe this was the original intention of the Pension Plans when they were negotiated. Investments are well and good when the market is up, but the company must be prepared to "kick in" when the market goes down in order to keep the Pension Plan viable and prevent deficits.

Extending the solvency-funding period can reduce the company’s annual pension payments to a level that facilitates its emergence from bankruptcy protection. However, by extending the funding period, it is the Pensioner that inherits certain risks including the risk that the plan sponsor could fail before the plan’s solvency deficiency has been eliminated. Again the Pensioner suffers.

When an Employee has worked and contributed into a Pension Plan for years, there should be no uncertainty as to whether or not they get their Pension. The first consideration given should be to implement mechanisms that would provide priority protection for plan beneficiaries in the event of default by a plan sponsor that has been granted funding relief. The CNPA recommend that legislation be passed stating that any Company that is making a profit should not be allowed to be in a deficit situation in its sponsored Defined Benefit Pension Plan. This would be using the same principle as the responsibility that a Company has to pay its Active employees.

Companies with going concern deficits, which are being funded over a 15-year period have usually developed large deficits. Why were corrective actions not taken earlier to prevent this deficit? Maybe all companies with Pension Plans should be monitored or watched more closely for this problem developing. Funding flexibility to companies that are restructuring under the protection of the CCAA or the Bankruptcy and Insolvency Act (BIA) is great, but would it not have been cheaper or easier to help them prevent getting into this position. At least it would not put the risk on the backs of their Pensioners.

The CNPA agree that while the particulars of each pension plan and plan sponsor seeking a form of funding relief will differ; one option is to set out certain parameters in legislation and/or regulations, while providing the Superintendent of Financial Institutions with the authority to approve applications for relief, as different terms and conditions would need to be applied to each case. Any relaxation of funding requirements must have conditions attached to recognize and minimize the potential increase in risk. If the Government of Canada is serious as to what the conditions should be, it must always keep the end goal in mind, the Pensioner.

In regard to the Government of Canada seeking views on whether there are alternatives to address funding issues other than relaxing funding requirements, would special accounts for pension plans be feasible? We believe that if a special account were created that would include amounts paid in excess of the proven full funding requirement; then and only then, could the excess be returned to the sponsor for use; but only after it has been satisfactorily proven they are no longer needed to fund the plan.

The CNPA agree with the Government of Canada’s view that there should be greater disclosure provided to plan members regarding a plan sponsor’s financial condition, funding decisions, contribution holidays and how/why this would be done. Pensioners could be provided with comprehensive annual financial statements perhaps similar to those provided to shareholders of mutual funds and publicly traded companies. Incomplete information or information that is hard to understand being given to Pensioners leads to stress and confusion. Basic guidelines could be prescribed by the Government and other items of interest could be negotiated between the company and the employees. Better still, Pensioner representatives must be more integrally involved in the decisions and recommendations involving improvements or changes in their Pension Benefits. The CNPA believes that an Actuarial review should be conducted every year instead of the current three years bearing in mind some of the problems that have occurred over the last couple of years.

Void Amendments

The CNPA agree with the Government of Canada on its proposal to implement the void amendments of the PBSA. However, based on a prescribed solvency ratio level of 100 per cent, (note the emphasis is on 100 per cent) and, to reduce the priority of claims against pension plan assets for recent benefit improvements that have not been fully funded, and to restrict significantly under-funded plans from making plan improvements that would further weaken their plan’s funded status. The CNPA believe, that in situations where a pension plan has a deficit at plan termination, benefits that result from plan amendments that came into effect less than 5 years before a plan terminates, should have a lower priority claim on pension plan assets than other benefits, based on the extent to which these recent benefits have been funded. This measure would enhance the security of longer established benefits that would be only fair to older Pensioners that have smaller pensions in most cases.

The regulations to implement paragraph 10.1(2)(b) of the void amendments provision of the PBSA, ( in order to reduce the risk that the under-funding of defined benefit pension plans that could lead to less than the full pay-out of promised benefits ) added to the PBSA in 1998 have not been made to date. We ask why not? Will the results of this document get the same treatment?

Full Funding On Plan Termination

The CNPA would agree with the public consultations that were conducted in 2001 on a proposal to strengthen pension funding requirements, so that on plan termination, plan sponsors would have an obligation to pay into the plan, the amount necessary to provide the full benefits promised to plan members at the date of termination of the plan. There was broad support for the concept at that time and probably still would be today. This requirement would mean that plan sponsors would not be able to terminate an under-funded defined benefit plan, without addressing the plan’s funding shortfall and should be enforced by legislation. The question that the Government of Canada is therefore posing, is whether this obligation should be different for financially vulnerable plan sponsors. The answer is a definite yes. In most cases, the financially vulnerable companies got into that position through poor management, judgement or investment. These companies should be examined very closely before putting their Pensioners at further risk. The rights and interests of Pensioners in their Pension Plan should have priority rights to company assets ahead of all other creditors.

Pension Benefit Guarantee Fund

It is mentioned that some countries have chosen to focus on strengthening funding rules and ensuring strong regulatory regimes, while others have recently chosen to operate a Pension Benefit Guarantee Fund (PBGF). While some countries have a PBGF, Ontario is currently the only jurisdiction in Canada to have one. The attraction of a PBGF is that it provides pension compensation to employees, retirees, and beneficiaries if an employer becomes bankrupt or insolvent and its pension plan is under funded. We note the one major consideration is that a PBGF could provide a disincentive for employers in financial difficulty, to properly manage their pension plans to control risks if their pension liabilities will be covered. The CNPA recommends that should a company that is failing to properly manage their sponsored Defined Benefit Pension Fund, that after being given a corrective warning to that effect, should be legally forced into taking an insurance to protect the Pension plan. This would be a strong incentive to these companies to be responsible Pension Fund Managers. 

We note also, there would be an increase in cost to plan sponsors through insurance premiums. Should responsible employers be expected to pay this premium? We do not believe it would be fair. As well, you are penalizing any companies that are looking after their Pension plans properly. We believe that the PBGF would in very short order have insufficient funds to cover its pension liabilities. This could lead to pressure for government funding. We note with concern that the PBGF’s in Ontario and the U.S. are experiencing significant deficits at this time. The CNPA would ask that you drop this item for consideration before this problem grows and is placed on the backs of the taxpayers or indirectly, the Pensioners that you are trying to protect.

The CNPA believe the Government should take steps to encourage companies to make keeping their Pension Plans up to date a priority. They should not be allowed to let their plans slide and then ask for help to find ways to meet their obligations. However we note at the present time, under the present system, that we presently have companies with Pension Plan problems that must be dealt with on an individual basis one on one. The Government must pass legislation to make the Pension plans sustainable as originally planned and not allow Companies to wait and "patch" them when they fail.

The CNPA would request the opportunity to be heard when the Federal Government arrives at the point of suggesting specific changes to Pension funding when the review reaches that point.