They get the guarantee, we get the bill
Fi ve years after t he Drummond report was released, the Ontario Liberals are still thumbing their noses at it. The Commission on the Reform of Ontario’s Public Services chaired by Don Drummond released a report in 2012 with a comprehensive set of recommendations to meet Ontario’s economic and fiscal challenges. Among the numerous recommendations ignored by the Ontario government was one recommending the elimination of the Pension Benefits Guarantee Fund (PBGF) or transferring it to a private insurer. The PBGF replaces retirement income in the event of the failure of a definedbenefit pension fund. Instead of abolishing the fund, the Ontario government has now announced benefits will be expanded by 50 per cent, from $1,000 a month to $1,500.
The recommendation by Drummond to abolish the PBGF altogether was a sensible one. Drummond cited a 2010 actuarial study commissioned by the Ontario government that the PBGF was not sustainable in its current form. The history of the PBGF is consistent with that of other countries with government backstops f or defined- benefit pension plans, which is that it amounts to a combination of moral hazard, deficits and taxpayer bailouts. In Ontario’s case, in 2002 the Ontario government loaned $ 330 million to the fund when Algoma Steel was unable to meet its pension obligations. Then there was the $ 500- million grant the government transferred to PBGF in 2010, when Nortel’s pension plan proved insolvent. The PBGF dodged a multi- billion- dollar bullet with General Motors in Canada in 2009, but only because of a government bailout.
The announcement of the expansion of benefits was made concurrently with an easing of solvency regulation for defined- benefit plans that will make future insolvencies of these plans both more likely and more expensive to the PBGF. The timing for this policy change could not have been worse, given that a low- yield environment has incented pension funds to take on more risk in their investment portfolios, including riskier assets and the use of more leverage. The recently announced expansion of PBGF benefits will further incentivize risky behaviour.
Is a backstop for defined- benefit pension plans needed in Ontario to save pension recipients from financial hardship? Pension insolvencies typically result in reduced benefit levels but not in a complete loss. The more likely outcome when an employer is unable to fulfill its pension commitments is that the pension recipient will have to accept a benefit “haircut.” In other words, the recipient will receive a reduced pension rather than no pension at all. This will be on top of other sources of retirement income, such as the Canada Pension Plan and Old Age Security. Ultimately the impact of the pension fund’s insolvency will be unpleasant but not the end of the world. It is hardly fair that millions of taxpaying Ontarians who lack a defined-benefit pension plan have to subsidize those who do have one.
What has changed since the Drummond report? Pension plan administrators have become more sophisticated in managing the risks embedded in plans. There are now mechanisms for transferring longevity risk, which is the risk of retirees living longer than anticipated and costing the plan more than planned. Some plans are reducing both longevity and investment risk by simply purchasing annuities. The regulatory framework for pensions should encourage this type of prudence. In contrast, Ontario has now signalled to pension administrators, “Don’t worry. Be happy. Taxpayers have your back.”
IT’S NOT FAIR THAT ONTARIANS WHO LACK A DEFINED-BENEFIT PENSION PLAN PAY MORE TO SUBSIDIZE THOSE WITH ONE.