The Pension Investment Association of Canada is reiterating its concerns about Bill C-228, which was designed to protect members of defined benefit pension plans during windups.
“PIAC shares the same concern as the [House of Commons] standing committee on finance that pension security is paramount for our members,” wrote Peter Waite, executive director of the PIAC in an open letter to the committee. “However, we strongly disagree that the method to achieve pension security is through adopting a super-priority for unfunded pension liabilities and employee retirement benefits in insolvency situations.”
The private members bill would give super-priority to plan members over other creditors during bankruptcies or plan windups. It would also amend the Pension Benefits Standards Act, 1985 to require that DB plan sponsors insure member contributions and authorize underfunded plan administrators to transfer assets and liabilities to other pensions.
Read: ACPM warns of ‘unintended consequences’ of pension super-priority bill
In September, the PIAC co-signed another open letter to the standing committee calling for parliamentarians to block the bill. The Association of Canadian Pension Management, the Canadian Bankers Association, the Canadian Chamber of Commerce and the Canadian Manufacturers and Exporters also served as co-signatories on the earlier letter.
According to the PIAC’s more recent letter, the overall impact on the pension and business environment would be harmful for DB pension plan sponsors. “As a result, the risk of sponsoring such a plan would be too high, forcing employers to close their DB pension plans.”
By implementing new super-priority rules, the PIAC argued the bill would cause companies that sponsor DB plans to be subject to higher interest. “The super-priority for pension plan deficits would alter the risk profile assessed by creditors. These changes would affect credit availability, particularly for companies with DB pension plans. Creditors could require additional credit or collateral sources, resulting in an increased chance of struggling businesses becoming bankrupt. Other reporting requirements would also be enacted to monitor solvency, adding further complexity to subsequent loans.”
The bill would make Canada’s business environment more difficult for DB plan sponsors due to the way their actuarial valuations are calculated, argued the letter. With solvency liabilities far exceeding going-concern liabilities during downturns, credit would become expensive during the periods in which it’s most required. “Thus, the consequences would be a vicious cycle: when organizations need liquidity to stay afloat and sustain jobs, credit would be hard to acquire and pension plan costs would increase.”
The letter also argued that insolvency protocols already in use in some Canadian provinces offer a measure of protection to plan members. It cited the 2007 bankruptcy of Stelco Holdings Inc. in which pension solvency funding requirements forced the Ontario company to declare bankruptcy; though, by working with stakeholders, it was restructured and business operations continued. “Recognizing this, most pension jurisdictions in Canada changed their funding rules to emphasize going-concern funding of plans over solvency funding.”
The PIAC recommended another alternative approach to protecting plan members: easing the transition from a single-employer pension plan to a multi-employer pension plan. By simplifying the rules around this, the fate of an individual pension can be protected from a company’s bankruptcy, it said. “While the pension transfer may not be able to replicate the existing pension at full value, the long-term nature of MEPP pension management combined with indexation can bring close to full restoration of the pension benefit.”
The private members’ bill was introduced by Conservative member of parliament Marilyn Gladu in April. During its second reading in June, it garnered the support of all but one parliamentarian — Liberal MP Parm Bains. A third reading is likely to be scheduled later this month. A similar bill proposed during the previous parliamentary session faltered before its final reading due to the lack of support it received from Liberal MPs.
Read: PIAC warns of ‘unintended consequences’ of pension super-priority bill