Apart from the issue of scale, the comparison to a compulsive gambler is not specious, says David Burke, retirement practice director with Watson Wyatt Worldwide. “It’s not that far from the truth. The problem is, there’s not much you can do. Many plan sponsors have had pressure from their boards to do something. But, for example, if you move from equities to bonds while 70% funded, you’re locking in those losses.”
Burke explains how, over the last 20 years, there’s been a general belief from a plan sponsor perspective that the good times would continue. “Back in the late ’90s and early 2000s, pension plans—at least from a balance sheet and income statement perspective—were cheap,” he says. “They were in good funding shape, interest rates were high and the cost was low. That became the norm.”
The perfect storm of 2001 brought people back to earth—until it was followed by a rebound in the economy in 2002, which pointed pension plans back in the right direction. By 2007, Burke explains, most plans were fully funded again.
He says there are two key considerations in today’s scenario. The first is that pension plans aren’t cheap. “Good pension plans cost money, and to think you can keep your costs down by taking significant investment risk and not having any downside to that is unrealistic in my view.” The second is that lessons learned also need to be applied. “Whether they are learned to the extent they should be is up to the plan sponsor,” he says. “Plan sponsors also need to ask themselves, How big is this relative to my business? If it’s big, they have to think about the whole business, and they can’t take inappropriate risk in the pension plan if it’s going to adversely affect their business.”
No Relief in Sight
In March, seven large companies—including Air Canada, Canadian Pacific Railway and Bell Canada—appealed to the federal government for immediate solvency relief, claiming that the current solvency regulations were forcing them to make large contributions to their pension plans at a time when the money would be better spent on operational costs. This request came on the heels of several provincial committee reports from Nova Scotia, Ontario, Alberta and British Columbia, all of which dealt with solvency relief to some extent. The federal government’s own committee, chaired by MP Ted Menzies, will report to Ottawa sometime in late 2009—too late to provide any tangible relief for plan sponsors suffering acute solvency problems.
However, these consultations have borne fruit in the form of stakeholder feedback. At a recent meeting in Toronto, Ian Markham, director of pension innovation with Watson Wyatt, spoke at length about the current situation of defined benefit (DB) plans in Canada, suggesting that decisive action should be taken so that temporary measures need not be debated each time we experience a financial crisis. He outlined three elements that are critical to improving the system: prohibiting plan termination when in deficit, adjusting asset mixes to minimize the chance of deficits and making funding valuations more frequent to respond to major market shifts more quickly. “The laws across Canada have blessed the idea of a full actuarial valuation taking place only every three years,” he explained. “That is a long time in a volatile world.”
According to Jim Leech, president and CEO of the Ontario Teachers’ Pension Plan, the tax and accounting rules that prohibit plan sponsors from funding their plans past 110% are the biggest hindrance to the vitality of DB plans. “This whole notion that if you have a surplus of over 10%, you have to stop contributing—it’s got to be one of the dumbest things I’ve ever seen,” he says. As an institutional investor, he sees the effects of these rules on plan sponsors and their businesses every day. “We see it in the business we invest in. They tell us they’re going to get rid of their DB plan because they can’t afford it, and we have to agree with them because, under the current rules, it’s unworkable.”
Heather Gavin, chief administrative officer and plan manager with OPSEU Pension Trust, agrees, arguing that removing the caps on surpluses would allow DB plans to better manage volatility. “We went into 2008 with a surplus, which will help us manage the impact of our investment losses, but we’re still looking at a deficit when we file our next funding valuation,” she says. “It would certainly be helpful to DB plans generally to be able to put more surplus away as a cushion against poor returns.”
Perhaps, says Forestell, but the extreme nature of the current downturn makes any argument over funding limits an academic exercise. “A plan that was 110% or 120% funded at the beginning of 2008 still would have been underfunded at the end of 2008, given what happened in between,” he says. “So although I agree that it would be helpful for some of these things to be made more pension plan-friendly—the court decisions, the laws—that alone will not fix this and didn’t alone cause it.”
The Pensioner Perspective
One perspective that occasionally gets lost in the chatter is that of retirees. Media coverage of the Canadian Auto Workers’ (CAW) battle with General Motors (GM) and Chrysler suggests that pensioners are under the assumption that if their former employer goes bankrupt, so does their pension. Not so, says Brian Rutherford, GM retiree and chair of the GENMO salaried retirees group, which works to protect the pensions and benefits of salaried pension plan members with GM Canada. He explains that angry, fearful retirees may help the media-savvy CAW in its battle on the airwaves but do not represent the average plan member.
Rutherford explains that the anger among GM retirees has a lot to do with the Pension Benefits Guarantee Fund (PBGF) and Premier Dalton McGuinty’s recent announcement that it will not apply to GM, should the company become insolvent. All of GM’s assets belong to the U.S. division of the company, he says, so in the event of liquidation, it would be the government they would look to. “I don’t want to be a burden on the taxpayer. But if the government was the one that allowed GM to underfund my pension, do they not have to take on some of the liability?”
While he is quick to point out that the state of the economy is the catalyst for the current pension woes, Rutherford believes that the Ontario government shoulders the lion’s share of the responsibility for allowing plan sponsors to take their pension plans into such deep waters. He points out that GM has been the largest contributor to the PBGF, so the government’s financial problems are not his concern. “It’s the government’s insurance program, not ours,” he says. “We made our payments faithfully, so why would we not expect to reap the rewards?” Rutherford compares the situation to watching your house burn down, knowing you have fire insurance—only to discover the insurance adjuster at your side who matter-of-factly informs you that you won’t be covered.
Diverse Directions
With all of the media attention and the government committees assigned to these issues, it’s hard to imagine that a solution is far off. Unfortunately, the legislative patchwork that is Canadian pension and tax law means that various governments have come to their own conclusions.
The committee that drew the most accolades was the B.C./Alberta Joint Expert Panel, which not only studied all types of pension plan options but also recommends the creation of a single fund that trusts its investment strategy to an expert, independent group. The cost would be limited to 0.50%—in line with what the larger DB plans pay to administer their pension arrangements.
“That’s where the thinking needs to go,” says Leech. “We’re too myopic when we look at whether we can have three or five years to make up funding shortfalls. That only affects the people who are in a DB plan today.” He believes that the current situation may be just the spark needed to move pension issues to the top of the political agenda and expedite a solution.
“This could be the issue in the next election,” Leech explains. “Pensions have the ability to be the free trade debate or pipeline debate of previous elections. We’ve got to do something, or we’ll have hundreds of thousands of people retiring without safety nets.”
Jody White is associate editor of benefitscanada.com..
jody.white@rci.rogers.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the June 2009 edition of BENEFITS CANADA magazine.