Current pension deficits pose a crisis to the future and stability of plans, according to lawyer Sheldon Wayne of Hicks Morley.
He came to that conclusion after a study by the Financial Services Commission of Ontario showed that that 75% of the more than 1,500 single-employer pension plans it looked at are underfunded on a solvency basis and the Office of the Superintendent of Financial Institutions estimated that 78% of its registered plans are underfunded on a solvency basis, and that underfunding continues to bring the solvency level to 90% and lower.
A deficit occurs when the liabilities are more than the assets and a solvency deficit is usually amortized over five years, with equal monthly “special payments,” he said at the Intercontinental Hotel in Toronto on Thursday.
What, exactly, are Canadian governments are doing about this deficit? Wayne and Rachel Arbour, an associate, discussed the governments’ response under: tailored solutions, public sectors plans and private sector plans.
Tailored solutions With Algoma Steel, Air Canada and Stelco, each of the company’s restructurings were combined with company-specific regulations to address their pension funding.
These regulations created a new way of determining the plan’s funding, such as a fixed contribution requirement(Stelco), or extended the amortization period to 10 years(Air Canada)or 15 years(Algoma), she continued.
The regulations have also imposed restrictions on companies: increase regulator involvement and limit the kinds of benefit increases or plan changes, she said.
Public Sector Government regulations in public sector pension plans focus mainly on municipalities and universities. These regulations include exemption from solvency rules, suspension of special payments(in 2005, The University of Winnipeg had the option to suspend special payments until July 2008), and consolidation and distribution of payments over a longer period(usually up to 10 years)so lower payments can be made.
Private Sector Over the past two years, Quebec, Alberta, New Brunswick and the federal government have proposed or passed changes for private sector plans, including the extension of the amortization period and use of letters of credit for a period of more than five years.
Federal Budget The government’s final regulations on solvency funding for pension funds registered under the Pension Benefits Standards Act were released a few weeks ago. “These regulations apply to plans established before 2006 and will stay in place until 2019,” said Wayne.
There are three options for single-employer plans; multi-employer plans cannot use the third option.
1. Consolidate solvency payment schedules and make re-determined payments up to five years.
2. Extend the amortization period and distribute lower payments over 10 years as long as no more than one-third of the members object.
3. Extend the amortization period and distribute lower payments over a 10-year period and use a letter of credit.
4. Agent federal crown corporations can extend their amortization periods to 10 years as long as they receive written authorization from the minister of finance.
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