Task force makes recommendations to secure DB pension plans

(August 24, 2005) There are a number of issues threatening the future of defined benefit (DB) pension plans. Financial advisors are probably already aware of the trend — between 1992 and 2003, the number of Canadian workers covered by workplace pension plans dropped from 44% to 34%. The decline in coverage has been most significant in the private sector.

A task force created to identify and address the issues found that asymmetry, or the fact that employers are ultimately responsible for funding benefits and shortfalls but prevented from using any surplus in the plan, is a key issue related to the funding of most DB plans. The task force also examined funding and disclosure requirements, concluding that that the roles of key players involved in funding and administering of DB plans need to be clarified and set out in legislation if necessary.

Paul Litner, chair of the Association of Canadian Pension Management’s (ACPM) Funding Issues Task Force, says the current set of funding rules are being questioned by regulators, plan sponsors and actuaries alike. He says they’ve been in place for more than 15 years, and should be reviewed to see if they still meet their benefit security objectives.

ACPM says fewer Canadians will be covered by DB pension plans in the future and many plans will be under-funded unless governments make significant changes to the rules governing workplace pension plans.

The task force began work 18 months ago, and today released a report, entitled Back From the Brink: Securing the Future of Defined Benefit Pension Plans.

“Some have suggested that we are still at the brink, or even worse,” says Litner. “However we are optimistic that the report and its recommendations, if heeded, will result in a stronger environment for the funding of defined benefit pension plans and an environment in which plan sponsors will not only maintain existing DB plans but also establish new ones.”

The report concludes that Canada’s current rules and legislation do not encourage employees to continue offering DB plans as a retirement savings option for their employees. “Existing rules do not encourage the adequate funding of DB plans — which results in under-funded plans offering less benefit security,” says Litner.

The ACPM report urges governments to review current funding rules for DB pension plans and remove the barriers to rational funding. Right now, current rules encourage companies to embrace minimum funding strategies which can lead to funding shortfalls that put future benefits at risk, the report maintains.

Along with strengthening disclosure requirements and ensuring that plans have a written funding policy, the report also recommends amending the Income Tax Act to enable plan sponsors to better manage their DB plans. Currently, Income Tax Act thresholds limit plan surpluses. Litner says the task force found those limits were too low and arbitrary, and should be raised or eliminated altogether.

Members of the ACPM say it is not too late for Canadians to reverse the trend to lower DB plan coverage, but doing so will require public debate and significant changes to current laws and regulations.

“The time is right and the time is now. If things don’t change, people need to be prepared to accept the status quo,” says Litner. “I think the way to get beyond reports is to create dialogue and get all stakeholders involved. Get public debate going and get it on the government’s legislative agenda.”

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com