OTTAWA — Ottawa has announced it will change the way federally-regulated company pension plans are run to provide greater protection for retirees.
Finance Minister Jim Flaherty unveiled a series of changes Tuesday he said will help put private-sector plans on a more sound footing, while extending guarantees that pensioners won’t get short shrift in times of economic crisis.
The minister said companies who wrap up plans will be required to pay all the benefits owing their workers, not just the portion that had been paid up.
And he said firms will no longer be able to take a holiday from contributions unless the firm’s plan has a five-per-cent funding cushion.
The measures affect the roughly 12 per cent of private sector plans that fall under federal jurisdiction, such as plans at Air Canada (TSX:AC.B) and the two major national railway companies.
In an change that will impact defined benefit plans under both federal and provincial jurisdiction, the government it will increase the threshold by which plans can be in surplus from 10 to 25 per cent.
The change is called a “rainy-day” provision that safeguards against the economic and financial disruptions that have recently caused so many plans to become significantly underfunded.
“These reforms will provide enhanced benefit security for workers and retirees while allowing pension plan sponsors to better manage their funding obligations as part of their overall business operations,” Flaherty said in the release.
The reforms, which are the culmination of a process begun by Flaherty in January, are meant to deal with some of the concerns and shortfalls that have occurred since last fall’s stock market crash and economic downturn. Some estimates place the level of underfunding at up to $50 billion.
The reforms, however, don’t cover the vast majority of pension plans that are under provincial jurisdiction, such as the plan at Nortel Networks, where workers fear the insolvent technology company’s dismantling under bankruptcy protection will leave them out in the cold.
And they don’t deal with problems that arise when companies declare bankruptcy, putting the unfunded portions of their workers’ pensions in jeopardy.
A government official said other retirement income issues will be discussed in mid-December when Flaherty and provincial finance ministers meet in Whitehorse to consider the results of the federal-provincial research group led by MP Ted Menzies.
“This is a step in the process, it’s an important step, but it’s not a panacea,” said the official.
Earlier this year, Ottawa gave companies more flexibility in meeting their pension obligations by extending the period they have to cover a deficit from five years to 10.
Other reforms announced Tuesday include changes to reduced funding volatility,and to allow participants to negotiate changes to their pension arrangements.
The government said some of the changes will require legislation to be enacted.
While the changes are welcomed, they may not help in the short term, said a pension expert.
Malcolm Hamilton, with Mercer Human Resource Consulting, said the proposed changes will do little to fix the short-term problems faced by Canada’s pension plans, which have taken a beating from the financial crisis as well as historically low interest rates, with many suffering serious solvency deficits as a result.
“I wouldn’t expect it to have a large impact and it would certainly have no immediate impact,” Hamilton said.
“The problem today isn’t plans with a surplus that they’re not being allowed to leave in the plan, the problem today is plans with no surplus, and allowing them to stockpile surpluses in the future doesn’t change the fact that they weren’t allowed to do it in the past.”
(With files from Kristine Owram)