OSFI warns of reduced pension benefits

Sometimes getting a reduced benefit pension plan is better than no plan at all. This is the tough reality some pensioners may have to face going forward according to Nicholas Le Pan, head of the Office of the Superintendent of Financial Institutions (OFSI).

OFSI has seen a marked increase in the number of plans seeking to reduce benefits, Le Pan told a gathering on Thursday at the Empire Club in Toronto, generally small to medium-size plans.

“In some cases, this option may be better for plan member than the alternative of plan termination,” says Le Pan. Right now the impact is limited to about 7,000 to 8,000 pensioners, who face reductions of between 5% and 10% of their pension benefits. He adds that not all of the cuts will affect retirees.

Although the regulator doesn’t like this scenario, Le Pan, in a short question-and-answer session after his speech, encouraged plan administrators who face looming problems to consult OSFI for help to determine if a reduction is the best option available for plan members and pensioners.

With challenges like low interest rates and longer life spans, plan administrators need to evaluate if current benefits will still be affordable. Looking ahead, Le Pan believes defined benefit pension plans will be under the greatest pressure, thanks to changing tax rules, ongoing fights over pension surpluses, the costs of complying with federal and provincial rules and rigidity in plan funding rules.

About 75% of defined benefits plans have a solvency ratio of less than one, reports Le Pan. As a result, the list of plans being watched by the regulator is expected to swell even more. That’s one reason defined contribution plans — similar to group RRSPs — are becoming more popular.

Le Pan also notes that the federal finance department has inaugurated a discussion to equalize the rules for defined benefit and defined contribution plans. But it won’t resolve current funding deficits, he says, urging plan administrators to be proactive and keep plan members informed about the health of pension plans.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(02/16/06)