Among those with the most to worry about when a company as big as Sears Canada Inc. enters restructuring proceedings are the members of the pension plan.
In the case of Sears employees, the company has a significant shortfall in its defined benefit pension plan despite closing it to new entrants in 2008. According to court documents filed as part of the Companies’ Creditors Arrangement Act proceedings related to Sears, the pension plan had a hypothetical windup deficit of almost $267 million and a transfer ratio of 81 per cent. So members of the plan, including the retirees, are in a somewhat vulnerable position, particularly when they also consider the shortfall in the company’s retiree benefits plan.
Read: Sears Canada seeking to suspend special payments as pension found to be 81% funded
The developments at Sears come as Ontario is taking action on solvency reform. According to changes announced in the spring, companies whose pension plans show a funded status of at least 85 per cent won’t have to meet solvency funding requirements. As in Quebec, they’ll have to maintain a funding reserve to address future risks but they’ll finally be free of the solvency funding requirements they’ve long complained are too onerous and that have, at times, forced them to make large payments to address short-term deficits.
So what does the new approach mean for people in situations like the members of the Sears pension plan? In this case, the gaps in the Sears plan had actually been forcing the company to make special payments of $3.7 million per month. The government has yet to finalize exactly how the new solvency regime will work, but at a funded status of less than 85 per cent, it presumably would require a company like Sears to make payments to address the gap. So in essence, the system does work to keep companies on top of their pension obligations, barring, of course, a filing under the restructuring legislation that can get in the way.
Read: Ontario announces long-awaited DB solvency reforms
Read: A look at Quebec’s pension solvency changes one year on
In an ideal situation, companies wouldn’t have pension deficits in the first place or they’d have to fix the problem more quickly to ensure there isn’t a major shortfall should they go bankrupt. The reality is governments face a delicate balance in ensuring they don’t push companies out of defined benefit plans altogether by imposing rules that are too onerous. In this case, the proposals do provide for reasonable protections, such as the reserve requirement and solvency funding for companies with the biggest shortfalls, that, combined with Ontario’s ever-controversial pension benefits guarantee fund, ensure members should get most of their benefits.
In effect, Ontario has largely struck a reasonable balance on defined benefit pension plans. But with significant concerns around retirement income adequacy for members of capital accumulation plans, Ontario — and the other provinces — also need to turn their focus to ensuring the rules promote better outcomes on that side of the pension industry.
Glenn Kauth is the editor of Benefits Canada.
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