Solvency Relief: It IS Rocket Science!

With further refinements to these conditions to resolve any practical issues and to ensure noncompliance comes with sufficient moral hazard, this solution offers a way to protect the current position of the plan while giving the employer an opportunity to “earn” its way out of the problem.

Permanent solution for a High-risk company (Ontario only)

The following alternative permanent solution for high-risk companies could work as another option for pension plans with Ontario members.

Loan from Pension Benefit Guarantee Fund (PBGF). Allow plan sponsors to borrow a lump sum amount from the PBGF equal to the capital value of benefits that the PBGF would otherwise provide if the pension plan wound up on bankruptcy. This would be applied to companies likely to be declared insolvent in the current conditions. The assets from the PBGF loan would be legally assigned to the pension plan and used for solvency funding purposes.

To qualify for this relief,

• The employer must be able to demonstrate a high risk of insolvency and have no unencumbered assets to put in the plan.
• The loan must be invested in government bonds and cannot be drawn down to pay benefits.
• The loan carries interest as per government bonds.
• No benefit improvements would be permitted until the loan is fully repaid.
• No future accruals of DB benefits would be permitted (but again, some level of DC contribution could be considered).
• The sponsor should consider having pension assets invested 100% in bonds.

In addition, the PBGF should be governed by the principles proposed by the OECP and only make loans to the extent that money is available.

Why make these loans available from the PBGF? On bankruptcy, the PBGF would be on the hook for the amount equal to the loan anyway. Furthermore, this solution provides a mechanism to help companies survive economic and financial market downturns without the PBGF or government taking on additional risk. In fact, the upside is that more bankruptcies will be averted, more Ontarians will keep their jobs, and more pensioners will maintain their current level of income. It’s a “win-win” outcome for everyone.

Summary

It is time to devise a permanent solution to the solvency shortfall crisis. That solution needs to strike a balance that meets the needs of all involved parties, and that alone is far more complex than the temporary solutions being proposed.

Let’s get over the issue of keeping it simple – this is rocket science!

Cameron J. McNeill is president and chief executive officer of Buck Consultants, an ACS company, and Kevin M. Sorhaitz is a principal and consulting actuary in Buck’s Toronto office.

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