More calls for pension reform

Many employers faced with increased contributions to make up deficit

With most defined pension benefits plans now in deficit — to the tune of $160 billion nationally — more calls are being made for fundamental pension system reform.

Almost 60 per cent of all defined benefit pension plans have deficits, according to a study completed by the Certified General Accountants Association of Canada.

The association warned that without changes plan sponsors and members are facing a “looming social and economic crisis.” Plan members may see benefits reduced while inadequately funded pension plans run the risk of bankruptcy.

To close the deficit, plan sponsors facing a shortfall would have to increase contributions by an average of 10 per cent of payroll in each of the next five years.

Paul Forestell, a pension specialist with Mercer Human Resource Consulting, which worked with CGA to complete the study, said not all sponsors are necessarily in crisis, but certainly any employer in deficit is looking at increased contributions to erase the deficit over the required five-year amortization period.

One change to help sponsors would be to extend the amortization period so that sponsors are given more time to erase the current deficit.

Last December, New Brunswick extended the amortization period to 15 years, in effect reducing the size of payments necessary to close a shortfall. Similar relief was given to help Air Canada by the Ontario pension regulator to help the beleaguered airline get out of bankruptcy protection.

Consulting firm Towers Perrin recently presented a 27-step plan for fundamental reforms to the pension system. The paper calls on government, plan sponsors and plan members to work together to rejuvenate and modernize Canada’s pension system so that defined benefit pension plans remain a viable option for employers, said Steve Bonnar, principal with Towers Perrin and co-author of the paper. (For a full list of proposed changes, go to, click on “advanced search” and enter article #3290.)

At the moment, because of flaws in the system, many organizations are looking at ways to get out of offering a DB plan and move to a defined contribution model, he said.

“If we go the way we are going without dramatic changes, (DB plans) will die a slow death,” he said. They will be closed to new entrants so that over a protracted period of time the plans will simply disappear.

One of the greatest problems for plan sponsors is uncertainty over pension surplus ownership. (At press time, the Supreme Court had not rendered its decision on the longstanding Monsanto case where a group of employees affected by a partial pension plan windup laid claim to some of the surplus that existed at the time of the windup. The Supreme Court decision is expected to answer the question of surplus ownership.)

Because plan sponsors are not entitled to any surplus that arises in a pension plan, they fund at a minimum level to prevent any surplus from arising in the first place. However, funding in that manner also makes it more likely deficits will emerge. The Towers Perrin paper calls for surplus control to be given to the employer.

“In an environment where the plan sponsor knows they own 100 per cent of any deficit but control over surpluses is uncertain, the only rational approach to take is to defer contributions as much as possible,” said Bonnar. If surplus is given to the plan sponsor, they will be more willing to make contributions above the absolute minimum. “We would expect to see a smaller degree of underfunding,” he said.

But at least one employee advocate says claims that the Canadian pension system needs major changes are nonsense.

Mark Zigler, head of the pension and employee benefits group for Koskie Minsky, the law firm representing Monsanto employees in the surplus case, said alarm over plan deficits is nothing more than a thinly veiled attempt to improve the situation for employers at the expense of plan members.

Pension funds are long-term propositions, he said. Many may be in deficit right now, but that does not automatically mean the employer or plan sponsor is facing imminent demise. There is no reason to panic or make sweeping changes, he said. “In the long run the pension system generally rights itself.”

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