May 25, 2009

New solvency rules may provide relief

Sponsors of DB pensions required to get approval from plan members to be eligible for extended deadline
By Angela Scappatura

Federally regulated defined benefit (DB) plan sponsors could find temporary relief from mounting pension costs if recently proposed solvency funding regulations are approved.

The Ministry of Finance outlined optional temporary solvency funding relief measures in early April. The proposed regulations would be available to seven per cent of the private pension plans in Canada and are designed to ease financial pressure on plan sponsors by extending the amount of time allowed to fund plans.

Under the regulations, sponsors would have the opportunity to apply for an extension of solvency funding payments from five years to 10 years.

Approval is dependent on the sponsor’s ability to attain consent from members and retirees. Alternatively, the sponsor would have to secure a letter of credit for the difference.

Without the option of relief, a plan sponsor would have no alternative but to fund any solvency deficiency, said Sonia Mak, a Toronto-based partner at law firm Borden Ladner Gervais.

Under current regulations, pension regulators do not have any flexibility to grant relief to struggling sponsors, said Mak. If a sponsor is unable to fund the deficiency, it would be in breach of the law and “there would be no practical way out,” she said.

If sponsors are allowed to pay the money over a longer period of time, it would help manage cash flow problems, said Mak.

“One dollar less you would have to pay in a plan would mean one more dollar available for your other business purposes, such as paying salary and financing your business,” she said.

“Even in situations where you have made contributions to the pension plan, that cash payment into the plan cannot be easily taken out, even if the funding position of the plan improves later.”

The process of applying for relief offers sponsors a chance to delay payment, she said. DB plan sponsors will have one year to attain consent or a letter of credit.

“If they cannot get it by the end of the year, (the sponsor) has to fund it from the day it decides, ‘I can’t satisfy the conditions,’” said Mak.

The one-year payment moratorium is another positive effect for a plan sponsor, she said.

Attaining member consent

One hurdle sponsors will have to overcome is attaining consent from two separate member groups, she said. The regulation requires sponsors to separately tally the votes of active members and beneficiaries.

“I can see active members may have an incentive to provide no objection because they want their employers to continue to exist,” said Mak. “But for retirees or beneficiaries, they may have not as strong an incentive.”

Depending on the pension plan, a sponsor may encounter a disproportionate group of active and inactive members, said Karen DeBortoli, Toronto-based director of the Canadian Research and Innovation Centre for consulting firm Watson Wyatt.

There is a concern the members could have a disproportionate weight one way or another, said DeBortoli.

The real issue, she added, boils down to how well a plan sponsor can communicate the reasons relief is needed to members.

In addition to a change in voting structure, the Canadian regulation should provide a fresh start for all plan sponsors — giving all federally regulated employers in a deficit position the ability to take advantage of the proposed new regulations, said DeBortoli.

Only those reporting a new deficiency between Nov. 1, 2008, and Oct. 31, 2009, are eligible to apply for relief under the 2009 regulations.

Deficiencies outside that 12-month window will be subject to rules outlined in 2006 temporary solvency relief regulations.

Sponsors already on an extended amortization schedule cannot apply for new relief.

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