The Canadian government is reviewing options to adjust pension funding obligations, after falling stock and bond prices have driven down asset values in corporate pension plans and prompted some plan sponsors to seek relief from funding rules.
Finance Minister Jim Flaherty said last week that his department is looking at options for federal rule changes, including extending the time period over which companies would need to put in more money.
“That’s been done before; that’s one of the options that is available,” Flaherty told reporters after a speech in Toronto.
“There are some other suggestions that are being made by the pension plans, and we’ll review the options.”
In 2006, the federal government took temporary steps to alleviate pressure on defined benefit plans for employees in industries under federal jurisdiction, such as transportation, broadcasting and banking. Provincial governments regulate pension plans in other industries.
One option that Ottawa previously allowed was for plans to extend their funding payment periods to 10 years from five, if members and retirees agreed, or if the difference was secured by a letter of credit.
“What has been done before obviously can be done again,” Flaherty said last week.
Thanks to plunging stock and bond markets, the funded status of pension plans has dropped by between 15% and 30% this year, said Paul Forestell, leader of the Canadian retirement professional group at consulting firm Mercer.
“A plan that was 100% funded at the beginning of the year could be 80 percent funded now, or even lower,” Forestell said, adding that this was the biggest drop since at least 1998, when Mercer began tracking the health of Canadian plans.
Companies that still have access to cash will be able to fund their plan deficits, he said. But without temporary relief, companies hurt by the economic downturn may have difficulty raising cash.
“If your business isn’t doing well and then you’re required to double or triple the money that you have to put into your pension plan, that’s a problem, it could be the proverbial straw that breaks the camel’s back,” Forestell said.
“I think it would be appropriate for all levels of government to give (pension) plans more time to meet their funding obligations, that’s really what companies are asking for,” Forestell added.
Many of them would like to be able to pay their funding shortfalls over 10 to 15 years, rather than five years, he said.
This week, Canada’s financial institutions regulator agreed to give insurance companies more time to set aside reserves for some of their long-dated payments.
“This is exactly the same,” Forestell said of the pension plans’ plight, noting that some will not have to pay benefits to retirees for decades.
The federal Office of the Superintendent of Financial Institutions regulates about 1,400 pension plans, or about 10 percent of all plans in Canada, and about 400 of those are defined benefit plans.
Also last week, telecom company BCE Inc. said it may have to pay much more into its pension plans next year.
“If the downturn in the capital markets continues to the end of 2008, our defined benefit pension plans will be in a solvency deficit position and additional significant contributions will be required in 2009,” BCE said in its third-quarter report.
Kathryn McQuade, chief financial officer at Canadian Pacific Railway, told analysts last week that the company is monitoring changes in the value of its defined benefit plan.
“Just like the rest of the world, we are experiencing on the equity portion of our plan some significant reductions,” she said during a conference call.
The Ontario Teachers’ Pension Plan, one of the largest pension fund managers in Canada, recently said it would fix its $10.4 billion funding shortfall by reducing future cost-of-living increases for its members when necessary. —Lynne Olver, Reuters