Separate Solutions

Here’s how it works. Quebec’s current and new retirees need not worry that a relief measure like the 10-year amortization period might jeopardize their retirement security (e.g., facing a payout ratio, after three years, of only 72% instead of 84%), because the Régie des rentes is prepared to take care of them if their former employer ends up bankrupt and unable to pay the plan’s deficit. Those members will be offered the possibility of having their share of the plan taken over by the Régie, which would then administer it for up to five years and guarantee that their pensions would not be affected by the relief measure (e.g., they would be guaranteed at least 84% of their pension rather than 72%). After five years, the Régie would buy insured annuities for the members (in the above example, at least at the 84% level).

Ontario retirees might say the Pension Benefits Guarantee Fund (PBGF) is still a better option because it covers pension shortfalls resulting not only from temporary solvency measures. That may be so, but the guarantee is limited to the first $1,000 of monthly pension. And the PBGF has certain disadvantages, including the source of financing to make up pension shortfalls. However, since the source of financing is a key consideration, Ontarians may wonder if Quebec experts have found a novel approach to foot the bill.

Financing the New Guarantee
One source of financing will be to take risks in the hope of generating investment gains. When the Régie takes over the administration of the pensioners’ assets (for a period up to five years), it will need to act in the retirees’ best interests. However, the Régie’s investment policy could be constrained by upcoming regulations. For example, since those assets will be in relation to pensioner liabilities, the level of risk will likely be limited by focusing mostly on bonds rather than equities. For the moment, it is not clear how such a limitation might be in the best interests of plan members, given the second source of financing.

The second source of financing will be the government itself—or, more precisely, the taxpayers. This results from the fact that pensioners are given a minimum payout guarantee that exceeds the plan’s actual solvency ratio. For example, if the guaranteed level is 84% versus a solvency ratio of 72%, the Régie will need gains of roughly 17% over bond yields (which are used to calculate the retiree liabilities) to avoid that second source of financing.

It’s unlikely that a conservative investment strategy would produce that kind of gain over a five-year period. But pensioners need not worry about the investment risks or the remaining shortfall (up to 84%, in the previous example) because the taxpayers will cover it. Since the funding relief is meant to help employers survive the recession, it’s as though taxpayers are advancing a type of LC (for free) to cover the portion related to current or imminent pensioners.

The big question today is, How much will such a guarantee end up costing? This will depend on many factors, such as the extent to which employers will take advantage of the relief measures; which employers will declare bankruptcy over the next three years; the extent to which the plans will still be in a deficit position at the time of bankruptcy; the number of retirees (current or eligible) who will elect to transfer their funds to the Régie; the portion of the deficit that might still be funded from the bankrupt employer’s remaining assets; and how significant the investment gains that the Régie might generate will be.

Some of these answers are easy. Don’t count on substantial gains from the Régie’s conservative investments. Don’t count on the bankrupt employer’s assets. Don’t count on many retirees to turn down the Régie’s sweet offer. And don’t count on many employers to turn down the relief measures. It’s possible that a sharp market rebound will boost the solvency ratio—but how many optimists expect a rise back to 100% within three years?

The only question that remains—probably the most important one—is the number of bankruptcies that we might witness over the next three years. We can only hope that the economic stimuli dished out by various governments will kick-start the economy before we see too many bankruptcies. But while those other stimuli produce government deficits in the short term, this new form of pension guarantee does not seem to be accounted for on the government books.

Could this become an election issue? Will pensioners push for an extension of this new measure, in terms of time or eligibility? Solvency relief measures were supposed to be ad hoc three years ago, yet they have been repeated for a second crisis. Will we come to rely on this innovative relief?

As Ontario is reviewing its long-standing PBGF, and other jurisdictions are debating reforms that could overhaul the balance of employer responsibility and pensioner security, will Quebec’s innovative guarantee seem an attractive remedy? Or will taxpayers—the majority of whom are not even covered by DB pension plans—object to the cost? The outcome will depend on the length and severity of the recession. Only when the economy recovers will we be able to see if it becomes an integral part of the Régie’s role to aid suffering pensioners.

Serge Charbonneau is a partner with Morneau Sobeco in Montreal.
scharbonneau@morneausobeco.com

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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the May 2009 edition of BENEFITS CANADA magazine.