On March 13, 2009, the Canadian federal government initiated a consultation process on federally regulated pension plans.1 In response, a group of seven influential companies, each with large federally regulated pension plans, prepared a joint submission, which is garnering much interest. The so-called Group of Seven comprises Air Canada, Bell Canada, Canada Post, Canadian National Railway Company, Canadian Pacific Railway, MTS Allstream and NAV CANADA and is supported by the Federally Regulated Employers – Transportation and Communication, which includes TELUS and VIA Rail Canada.
The consultation process stems from (and the Group of Seven's submission makes reference to) the temporary solvency funding relief for all federally regulated defined benefit pension plans proposed by the government last fall2 and confirmed in the 2009 budget. Specifically, the amortization period for solvency deficiencies under the Pension Benefits Standards Act, 1985 was extended temporarily from five to ten years for the purposes of calculating pension solvency for 2008. To access these temporary measures, companies must obtain consent from plan members and retirees or a letter of credit securing the difference between the five- and ten-year payment schedule, before December 31, 2009. The 2009 budget also contained an increased limit under the asset-smoothing method to 115%, from 110%, of the market value of plan assets.3 However, the government stipulated that any deferral of funding that results from an asset value in excess of 110% will be subject to a deemed trust. The draft regulations promised by government for public comment have not yet been released.
In its submission, the Group of Seven requested that the government make the temporary solvency funding relief permanent and remove the conditions required for access. The submission proposes additional safeguards to balance the increased risk borne by plan members and pensioners if the conditions are removed, including greater disclosure of the plan's funded status, annual actuarial valuation filings and full funding of any deficit on plan termination. The Group of Seven has also requested the elimination of the proposed deemed trust over any asset-smoothing values in excess of 110%.
The rationale underlying the Group of Seven's submission is not new. Defined benefit plan sponsors have long argued that the stringent funding requirements unnecessarily divert money away from operations, thereby damaging a company and its employees and pensioners. These problems are exacerbated by the current market volatility and the cash strain it is generating. In addition, the need for pension reform generally and funding reform specifically is not limited to the federal jurisdiction. Alberta, British Columbia, Ontario and Nova Scotia are currently reviewing their pension legislation, and pension plan funding has been identified as a central issue for each.
Several trade unions representing members and former members of pension plans sponsored by Air Canada have already made a submission to the Department of Finance responding to the Group of Seven.4 As pension consultations move forward, it is expected that many more employer and employee lobbying efforts will weigh in on the Group of Seven's submission.
We view the Group of Seven's submission as a constructive step toward reforming and strengthening federal pension legislation and we look forward to government action on this proposal and others like it. The public consultation process is scheduled to last until April 17, 2009, and legislative and regulatory amendments are expected in fall 2009.
Footnotes
1. Federally regulated pension plans are plans set up for the benefit of persons employed in connection with certain federal works, undertakings and businesses that are regulated under the federal Pension Benefits Standards Act, 1985.
2. Federal government's November 2008 Economic and Fiscal Statement.
3. Specification 2009-1 of the Superintendent of Financial Institutions on asset values used in pension plan solvency valuations is available online at www.osfi-bsif.gc.ca/app/DocRepository/1/eng/pension/acts/asst_smth_e.pdf.
4. This submission is available online at www.caw2002tca.ca/pdf/09-03-17_Group_of_7.pdf .
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
