Little guarantee for Ontario pensions

Pension fund unable to cope with bankruptcies
By Shannon Klie
|Canadian Compensation & Benefits Reporter|Last Updated: 07/13/2009

Ontario is the only Canadian jurisdiction with a pension benefit guarantee fund but decades of improper funding, combined with the stock market meltdown and impending failure of corporate titans GM, Chrysler and Nortel Networks, mean the fund won’t be able to cover all employees with at-risk pensions, warned Premier Dalton McGuinty.

Established in 1980, Ontario’s pension benefit guarantee fund (PBGF) covers single-employer, defined benefit (DB) pension plans registered in the province that have paid into the fund — with more than one million beneficiaries as of 2007.

Eligible plan sponsors pay into the fund annually based on the number of members and the plan’s unfunded liability status, with sponsors with higher unfunded liabilities (and greater risk of failure) paying a greater percentage.

With only $100 million in the fund, and GM Canada’s projected pension shortfall of at least $2 billion, there isn’t nearly enough money in the PBGF to support pensioners if GM declares bankruptcy, McGuinty told reporters last month.

The fund is “very modest,” he said, and could not meet the liabilities for the auto sector, should GM or Chrysler fail, or for large businesses from other sectors. Yet, he said, Ontario has a moral responsibility to its pensioners.

“There’s a big funding crunch. There’s a big problem. The government is aware of it. Ultimately, you worry that the people who take it on the chin are the pensioners. That’s a very legitimate worry,” said Mark Zigler, partner at law firm Koskie Minsky in Toronto, who is representing former and retired Nortel employees at the company’s restructuring hearings.

In the 2009 budget, the Ontario government proposed new pension rules, such as allowing the finance minister to lend money to the PBGF without authorization from the lieutenant governor and prohibiting the fund from running a deficit.

The changes are necessary because the fund hasn’t been properly managed for the past three decades, said Finance Minister Dwight Duncan.

At least twice in its nearly 30-year history, the fund has had to borrow money from the government when large plan sponsors have made claims (farm equipment producer Massey-Combines in the early 1990s and steel manufacturer Algoma Steel in 2001).

The Ontario government will continue to work with the Canadian Auto Workers union to protect workers as GM and Chrysler face bankruptcy, said Duncan, but there is only so much the government can do.

Exactly what the government will do remains uncertain, as does the way it will distinguish between who gets the coverage and who doesn’t, said Jim Stanford, CAW economist.

“We’re all concerned with trying to keep the company in business. That’s our top priority and that is the best way to protect the pensions of GM or any other group of workers.”

How the fund works

The fund, which guarantees the first $1,000 of a monthly pension benefit, is triggered when a sponsoring firm declares bankruptcy and winds up an underfunded DB plan.

For example, if a GM employee is supposed to receive a $1,500 monthly pension benefit but the plan is only 50 per cent funded when the company files for bankruptcy, the PBGF will guarantee the first $1,000 (with $500 paid by the plan sponsor and $500 paid by the fund). Of the remaining $500, the plan sponsor will also pay out 50 per cent or $250. So the employee will receive $1,250. Without the fund, the employee would only receive $750.

“That would be a horrible hit to both current pensioners and to those people who are counting on the pension credits they’ve earned in their working life already,” said Stanford.

One reason GM is in such dire straits is that in 1992, Ontario’s NDP government allowed the company, considered “too big to fail,” to underfund the pension plan. The plan is now projected to be less than 50 per cent funded, said Stanford, and is projected to have a $2-billion to $6-billion pension shortfall. Chrysler, on the other hand, is expected to have a mostly funded plan this year.

Both automakers are considering bankruptcy if restructuring plans to qualify for bailout funds from the United States and Canadian governments fail.

Nortel also in trouble

Nortel Networks filed for bankruptcy protection in January, which means it doesn’t have to wind up its pension plan, funded at 86 per cent in 2006, so it doesn’t have to dip into the PBGF for Ontario employees just yet.

The Nortel Retiree and Former Employee Protection Committee (NRPC), which counts 2,000 former Nortel employees as members, is seeking to represent all former salaried employees and retirees in the Canadian restructuring proceedings. The goal is to protect laid-off workers’ severance and benefits and retirees’ pensions, said Zigler.

There is some good news for pensioners. A company’s pension funds must be kept separate from the rest of its assets and can’t be used to pay creditors, said Zigler. Also, in bankruptcies, pensioners are high up on the creditor chain behind government payments and back wages.

For Nortel and GM, the PBGF is a last resort, said both Zigler and Stanford. As the companies restructure, hopefully they can work out deals with the government and creditors to fix the pension plan, said Stanford.

But it is disappointing the PBGF isn’t able to provide security, he said, as GM, Chrysler and Ford have been paying into the fund since its inception.

“For decades and decades the (auto) industry was one of the most profitable industries in Canada. It is today’s retired autoworkers who produced that wealth and the promise of a pension was part of their contractual compensation for the work they completed,” said Stanford. “If we want the pension system to have any integrity whatsoever, the people who produced incredible profit over the years have to be entitled to at least a minimum degree of security on their pension.”

But pension guarantee funds alone aren’t the best way to protect pensions, according to a 2007 report from the Organization for Economic Co-operation and Development that looked at such schemes in various jurisdictions, including Ontario, the U.S. and the United Kingdom.

For the funds to be most effective, they need to be considered along with other benefit protection policies, notably effective funding rules, concluded Benefit Security Pension Fund Guarantee Schemes.

To protect pensions, regulators should set strict funding and investment rules to ensure plans are always fully funded, said the report, though this is difficult in practice. Regulators should also give pension claims high bankruptcy priority or secured creditor rights so pension liabilities are covered by a bankrupt firm’s assets ahead of other creditors.

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