Quebec backs private pension plans

Short-term measure gives companies 'breathing room'

Under a new law adopted last month, the Quebec government will be able to take over the private pension plans of companies that go bankrupt — a move both business and labour groups are watching closely.

It’s a short-term measure, aimed at protecting workers and pensioners if their pension funds are insolvent. The legislation also gives firms more time to replenish pension funds.

“It gives companies some breathing room to meet their obligations and gives another protection to workers,” said René Roy, general secretary of the Federation of Workers in Quebec (Fonds de solidarité), one of the province’s largest trade unions.

The legislation was created through a committee of political, business and labour leaders. In the end, the legislation satisfies all parties, said Françoise Bertrand, CEO of the Federation of Chambers of Commerce of Quebec.

“It’s not a matter of being happy. It was a must. Some businesses would have had to close down,” she said.

Almost one million Quebecers are registered in 950 private pension plans, holding assets worth $100 billion. Under the law, pensioners will have the option of having the Quebec Pension Plan (Régie des rentes du Québec) take over management of their assets for a five-year period in the event their pension plan is terminated through bankruptcy.

The government will guarantee those pensioners receive at least their reduced pension levels, as measured at the time of insolvency. The province will not make up the shortfall, said Michel St-Germain, a partner at pension consulting firm Mercer in Montreal.

For example, if a pension plan was underfunded by 30 per cent, pensioners eligible to retire with a $1,000 monthly pension would have their pension cut to $700, a level of payment the Quebec government would guarantee for five years. Pensioners could potentially see an increase if the province’s pension manager improves the fund by investing the pension assets successfully. About 90 per cent of private pensions in Quebec are underfunded on an actuarial basis.

Ideally, the program should not cost the Quebec government a penny, said St-Germain.

“If things really work well, it should not cost anything because the pensions are reduced and the assets would be invested in bonds to back up that promise,” he said.

Still some uncertainty

However, St-Germain said he is uncertain whether the plan could accommodate all private pension plans, if several of the province’s major companies went bankrupt within a short time frame.

It’s for this reason Quebec shied away from creating something similar to Ontario’s Pension Benefit Guarantee Fund, which guarantees employee pensions to a maximum of $1,000 a month, he said. Ontario’s plan is risky because a large bankruptcy would require high government contributions.

The Quebec plan is solely a response to the current economic climate, said St-Germain. Annuities, purchased to guarantee a steady monthly income for retirees when a plan is terminated, are difficult to buy in tough times. This legislation gives the Quebec Pension Plan five years to buy annuities to remove the pressure of having to purchase at steep current prices.

“There aren’t many players in it,” he said. “It’s subject to wild fluctuations in interest rates. This simply makes the window wider, in terms of when you purchase those pensions.”

The program also eases the pressure on businesses trying to meet pension requirements, said Norma Kozhaya, research director and chief economist of Conseil du patronat du Québec, one of Quebec’s largest industry associations.

“Due to the financial crisis, pension plans have big solvency deficits,” she said. “Employers have to contribute big amounts, which they can’t invest elsewhere, to help their financial position. In some cases, it’s millions of dollars and can amount to 30 per cent of the payroll.”

The legislation is retroactive to Dec. 31, 2008, and in effect until 2012. This relief is only a short-term solution, said Kozhaya, who was a consultant on the bill.

“All of these measures are just to reduce the contribution level, but not to eliminate them,” she said. “We’re only dealing with the crisis.”

Changes are required in the long term to improve private pension plans, said Kozhaya. Among them, business leaders would like to share in pension surpluses. Right now, deficits are the responsibility of employers, but surpluses have to be shared with employees, she said.

Will other provinces follow Quebec’s example?

Others also hope Quebec’s new measures will have an unintended impact on private pension plans elsewhere. The Ottawa-based National Union of Public and General Employees (NUPGE) has been following the Quebec negotiations closely. National secretary-treasurer Larry Brown said he hopes other provinces will use Quebec as a model for similar, permanent legislation. He said if a major Canadian employer, with thousands of employees, were to go bankrupt, weakening or destabilizing the pension plan, there would be a tremendous impact across the country.

“All of the sudden, there would be all of those people who lost their jobs, plus the hundreds of thousands of others who lost their pensions. It just doesn’t make any sense,” he said. “We’ve got to inflate the economy from the bottom up, not just the top down.”

NUPGE would like to see a permanent pension program, similar to Quebec’s, that mimics the employment insurance system. The union has written a policy paper that recommends the federal government impose a minimal transaction tax to build up an account solely to back private pensions that have become insolvent.

“We would need governments to step up to the plate and say, ‘We’re not going to let pensioners be made to pay the price of a company failure,’” he said.

Meanwhile, the Ontario government is also introducing solvency-funding relief for pensions. The legislation, to be introduced this spring, would extend solvency amortization periods from five to 10 years, among other things.

Danielle Harder is a Whitby, Ont.-based freelance writer.

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