A number of commentators and organizations involved in the pension and benefits industry have recently taken aim at the funding crisis that currently befalls many pension plans. They’ve used the occasion to promote their various constituency interests, all in the name of trying to save Canada’s defined benefit pension plans.
The Certified General Accountants chimed in with a study earlier this year. Several of the actuarial consulting firms have contributed with various white papers. And we have the “model pension law” promoted by the Canadian Association of Pension Superintendents.
Protestations about flaws in the system were loudest in the days and weeks after the Supreme Court of Canada ruled on the longstanding Monsanto case in late July. The court said any pension surplus that exists at the time of a partial windup must be distributed in some manner.
Just about every special interest group has been heard from and is out to make some noise in public except one: the employees and pensioners on whose behalf these pension plans are established.
While some of us lawyers who work in the pension field speak for our employee and pensioner clients in individual cases, it is impossible to speak for them as a homogenous group. Different employee groups, pensioners and unions have differing opinions. However one thing seems clear: many purporting to speak for the “pension industry” or any of its professional or regulatory arms seem obsessed with the unsubstantiated theory that the current system is the fault of employees and the legal and statutory system that supports them.
The private pension system, they claim, can only be saved by removing a number of rights and protections that employees currently have, primarily rights to surpluses on partial or total plan windups.
Nothing could be further from the truth. The private pension system has endured funding crises in the past (even when there were very few laws and court cases that protected employees), primarily due to economic and demographic phenomena. The 1970s saw a major funding crisis due to poor investment returns, a crisis that wasn’t totally corrected until the mid-1980s. We have lived through stock market crashes, double digit interest rates, massive downsizings, bond market crises, low interest and annuity rates and many other phenomena that impact pension plans in the short and medium terms.
Each funding crunch has its own economic solutions and, as happens in Canada’s system, some pension plans fall by the wayside due to insolvency of sponsoring employers or decimation of employment in an industry-wide plan. For many of the casualties there is a safety net in Ontario called the Pension Benefits Guarantee Fund. Other jurisdictions have no such protection and many would like to see Ontario wind up the fund, leaving the United States as the only jurisdiction which backs up private pensions.
Pension plans in short-term deficit positions usually right themselves in the mid- to long-term, which is generally acceptable because we are dealing with long-term promises. Some funding infusions may be required, placing a burden on both employers and employees who are often asked to pay more or accept clawbacks to other parts of their compensation package to strengthen the pension fund or pay down pension deficits.
Economists familiar with pension funding recognize that both employers and employees bear risks in these defined benefit plans. For this reason our lawmakers, through pension statutes, and our courts, through their analysis of pension surplus and deficit issues among others, have sought to level the playing field when it comes to surpluses.
There is no doubt that some protections come at a cost. But it can hardly be said that these protections have caused a short-term (in pension plan terms) funding crunch that can only be solved by denying the employees’ rights to a surplus (while usually asking them to contribute to deficits), or by taking away rights that they have earned under some provincial statutes while promoting a “model law” that takes these protections to their lowest common denominator.
It is true that Canada has some of the most stringent pension funding laws in the world. And perhaps some elements must be revisited particularly if they offer little assistance to the plan beneficiaries. However, a dumbing down of pension rights so that those who advise on pension funding matters can save their employer clients some money at the expense of the pension plan members will not solve the funding problems. There is no doubt that the CGAs and the chartered accountants have to look more carefully at how pension fund promises are to be funded. But their approach to date has only served to view pension assets and liabilities exclusively from the point of view of their corporate clients without accounting for the rights of the plan members.
Instead of viewing pension plans as corporate profit centres (and now a source of corporate losses), perhaps the profession should examine the rights and interests of the employees before determining that the surplus is an unrestricted corporate asset. Current surpluses and deficits must be viewed in the context of longer term horizons of pension plans as well.
Mark Zigler
Lawyer
Koskie Minsky LLP, Barristers and Solicitors
Toronto
The Certified General Accountants chimed in with a study earlier this year. Several of the actuarial consulting firms have contributed with various white papers. And we have the “model pension law” promoted by the Canadian Association of Pension Superintendents.
Protestations about flaws in the system were loudest in the days and weeks after the Supreme Court of Canada ruled on the longstanding Monsanto case in late July. The court said any pension surplus that exists at the time of a partial windup must be distributed in some manner.
Just about every special interest group has been heard from and is out to make some noise in public except one: the employees and pensioners on whose behalf these pension plans are established.
While some of us lawyers who work in the pension field speak for our employee and pensioner clients in individual cases, it is impossible to speak for them as a homogenous group. Different employee groups, pensioners and unions have differing opinions. However one thing seems clear: many purporting to speak for the “pension industry” or any of its professional or regulatory arms seem obsessed with the unsubstantiated theory that the current system is the fault of employees and the legal and statutory system that supports them.
The private pension system, they claim, can only be saved by removing a number of rights and protections that employees currently have, primarily rights to surpluses on partial or total plan windups.
Nothing could be further from the truth. The private pension system has endured funding crises in the past (even when there were very few laws and court cases that protected employees), primarily due to economic and demographic phenomena. The 1970s saw a major funding crisis due to poor investment returns, a crisis that wasn’t totally corrected until the mid-1980s. We have lived through stock market crashes, double digit interest rates, massive downsizings, bond market crises, low interest and annuity rates and many other phenomena that impact pension plans in the short and medium terms.
Each funding crunch has its own economic solutions and, as happens in Canada’s system, some pension plans fall by the wayside due to insolvency of sponsoring employers or decimation of employment in an industry-wide plan. For many of the casualties there is a safety net in Ontario called the Pension Benefits Guarantee Fund. Other jurisdictions have no such protection and many would like to see Ontario wind up the fund, leaving the United States as the only jurisdiction which backs up private pensions.
Pension plans in short-term deficit positions usually right themselves in the mid- to long-term, which is generally acceptable because we are dealing with long-term promises. Some funding infusions may be required, placing a burden on both employers and employees who are often asked to pay more or accept clawbacks to other parts of their compensation package to strengthen the pension fund or pay down pension deficits.
Economists familiar with pension funding recognize that both employers and employees bear risks in these defined benefit plans. For this reason our lawmakers, through pension statutes, and our courts, through their analysis of pension surplus and deficit issues among others, have sought to level the playing field when it comes to surpluses.
There is no doubt that some protections come at a cost. But it can hardly be said that these protections have caused a short-term (in pension plan terms) funding crunch that can only be solved by denying the employees’ rights to a surplus (while usually asking them to contribute to deficits), or by taking away rights that they have earned under some provincial statutes while promoting a “model law” that takes these protections to their lowest common denominator.
It is true that Canada has some of the most stringent pension funding laws in the world. And perhaps some elements must be revisited particularly if they offer little assistance to the plan beneficiaries. However, a dumbing down of pension rights so that those who advise on pension funding matters can save their employer clients some money at the expense of the pension plan members will not solve the funding problems. There is no doubt that the CGAs and the chartered accountants have to look more carefully at how pension fund promises are to be funded. But their approach to date has only served to view pension assets and liabilities exclusively from the point of view of their corporate clients without accounting for the rights of the plan members.
Instead of viewing pension plans as corporate profit centres (and now a source of corporate losses), perhaps the profession should examine the rights and interests of the employees before determining that the surplus is an unrestricted corporate asset. Current surpluses and deficits must be viewed in the context of longer term horizons of pension plans as well.
Mark Zigler
Lawyer
Koskie Minsky LLP, Barristers and Solicitors
Toronto
