Federal Finance Minister Jim Flaherty’s recent proposal to offer funding relief to federally regulated pension plans is under fire for being unworkable in the current economic environment.
Last week, he proposed doubling the time-frame for solvency payments to 10 years from five years. To qualify for the extension, organizations must obtain the agreement of pension plan members and retirees by the end of 2009 or the securing of a letter of credit to cover the five-year difference.
These conditions are problematic, according to Kevin Sorhaitz, a principal with Buck Consultants in Toronto. “This will be very difficult. There is no credit out there, and plan members won’t be easily persuaded.”
He suggests that the proposal misses the point in that relief from solvency regulations is being offered to employers at the precise moment these regulations are protecting plan members.
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“What I’m hoping is that when they look at permanent changes, they look at it through that lens,” Sorhaitz explains. “We want to help employers, but we also have to protect those people who are at retirement age. I think we have to have a balanced approach.”
Michel St-Germain, a senior consultant with Mercer in Montreal, agrees.
“Credit is not available, it’s as simple as that,” he says. “Consent from pensioners will also be difficult to get, as they are a diverse group that is spread all over the world in some cases.”
As part of the proposal, the federal government will soon be launching consultations on issues facing pension plans, with a view to making permanent changes in 2009. St-Germain says the main issues for such consultations should revolve around the current amortization period, which is very short compared with other countries and should be extended permanently to 10 or 15 years.
He suggests adopting a national policy of using the smooth value for assets as opposed to true market value, as it gives plan sponsors more time to recoup losses incurred in recent months.
The timing of evaluations should also be revisited, explains St. Germain. “We don’t want a straitjacket where we have to do an evaluation in January 2009, which would be at the worst time possible,” he says. “We would like to have some flexibility to evaluate the plan at a more appropriate time in 2009.”
Sorhaitz would like to see a solution similar to the Ontario Expert Commission on Pension’s proposal for target benefit plans, which blends the fixed contribution aspect of multi-employer plans while getting away from the wild fluctuations in employer contributions.
He suggests an alternative solution to the letter of credit dilemma. “Instead of extending the amortization period with a letter of credit, why not assign corporate assets—and creditor proof—to the pension plan?” Sorhaitz asks. This way, he explains, real assets can back the pension obligations while lowering cash contribution requirements and the pension accounting expense, without having to extend the amortization period.
“This solution would work best for healthy companies,” Sorhaitz says. “And if a company is unhealthy today regardless of the pension plan, is solvency relief advisable?”
According to St-Germain, the government should meet with the provinces as soon as possible and listen carefully to both employers and unions. “We’re talking about employers who have to fund a deficit of 30% to 40% in January,” he explains. “That’s only a month from now. These are huge amounts and employers are not asking that these contributions not be made to the plan, just that they be spread over longer periods.”
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