Are pension plans allowed to operate in a deficit position?
Yes. Federal pension legislation allows a pension plan to operate in a deficit position.
Pension plan administrators must submit valuation reports to OSFI at least every three years indicating the funded status of the plan. OSFI has the authority to ask for valuation reports at any time, in the event that doing so appears warranted. This is generally the same approach followed by provincial pension regulators.
If a valuation report indicates that a plan is under-funded on plan termination basis, the administrator must fund the plan by making special payments over a five-year period. As well, an under-funded plan is required to file a valuation report every year until the plan no longer has a deficit.
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Why are pension plans allowed to operate in a deficit position?
The Pension Benefits Standards Act, 1985, recognizes that pension plans may at times find themselves in deficit positions as a result of a variety of factors such as benefit increases, changes in actuarial assumptions resulting in actuarial losses to the fund, and downturns in the financial markets. These deficits may be too high for sponsors to absorb in one short and ultimately discourage benefit improvments. That is why the legislation allows for plans to run deficits with the proviso that the plan sponsor make up the shortfall within a period of five years. At the same time OSFI's policy is to require the submission of annual valuation reports until the deficits are funded.
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Why isn't there a pension guarantee fund at the federal level?
Private pension plans are voluntary arrangements between employers and employees. A guarantee fund could reduce incentives for plan stakeholders to face, manage and solve their problems themselves. OSFI believes that the best protection for plan beneficiaries comes from solid funding and good plan management. Federally regulated pension plans and most provincially regulated plans are not protected by a guarantee fund. Any decision to create a pension guarantee fund at the federal level would need to be made by Parliament.
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