Reducing Pension Costs in Canada During Hard Times

The recent decline in financial markets has caused Canadian pension plans to become significantly underfunded. For instance, in Québec close to 97 percent of all defined benefit pension plans are currently underfunded.

As this continues, many employers may look for ways to reduce pension costs or at least offset increases of those costs. Such losses can have a significant impact on a company’s ability to survive the current economic downturn.

A growing deficit also can adversely affect a company’s relationship with its lenders, even if all the pension plan contributions required by law are being made.

Some of the changes employers may consider making to their defined benefit pension plans are:

• reducing, deferring, or eliminating ancillary benefits such as early retirement subsidies and cost-of-living increases;
• closing the defined benefit plan to new participants — instead offering a defined contribution plan or other benefits to new hires;
• winding up the plan (although this will crystallize liabilities and impose a five-ear funding schedule on any deficit).

But these changes can’t always be implemented without advance planning. Employees must be notified in advance of any modification to their benefits. A significant change, such as the wind-up of a plan, may require considerably longer notice. Because employers are being forced to take immediate action to reduce the financial burden arising from their pension plans, the federal government, as well as most provincial governments, has announced various solvency funding relief measures for pension plans.

On March 27, 2009, the Canadian Department of Finance released a regulation that provides temporary solvency funding relief for federally regulated — those in national industries like the banks, airlines, and shipping — defined benefit pension plans. The proposal allows these pension plans with solvency deficiencies reported at a plan year-end from November 1, 2008, to October 31, 2009, to extend their solvency funding payment schedule from five to 10 years. In order to qualify, plan administrators would have to meet one of two conditions by the end of the first year of funding relief:

• both members and retirees agree to the extended schedule; or
• the difference between the five- and 10-year payment schedule is secured by a letter of credit.

Québec has made a similar proposal. There, the government introduced a bill in January 2009 (called An Act to Amend the Supplemental Pension Plans Act and Other Legislative Provisions in Order to Reduce the Effect of the Financial Crisis on Plans Covered by the Act). As its title suggests, the Quebec bill proposes various measures to alleviate the effect of the financial crisis on private pension plans. The Quebec government is considering:

• allowing employers to consolidate, for one time only, unfunded liabilities and any new solvency deficiency created at the time of the next first actuarial valuation after December 30, 2008, into a single unfunded liability;
• extending the amortization period for the consolidated unfunded liability from five to 10 years; and
• allowing employers to “smooth assets” for up to five years — spreading the fluctuation in the value of assets. The effect of smoothing is to carry forward to future years a portion of the gains or losses attributable to market volatility.

Similarly, the Ontario government announced that it will introduce legislation to provide pension plans with temporary solvency funding retroactive to September 30, 2008. If passed, the new law would also extend solvency amortization periods from five to 10 years but only with the consent of active plan members or the collective bargaining agent and the retired plan members.

Alberta, British Columbia, Manitoba, and Saskatchewan also have announced solvency funding relief measures. Other provinces may already have solvency relief provisions in their current pension legislation that could be used to reduce employer’s obligations.

If you have a pension plan registered in Canada and if your contributions in the plan increase because of reduced pension assets, there may be ways to alleviate your financial burden. Be sure to check for new legislation in the applicable province.

Contact the author, Lyne Duhaime

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  Lyne Duhaime