Solutions for pension reform: just add surpluses
There’s bad-joke factor in the new pension regulations proposed Tuesday by federal Finance Minister Jim Flaherty. Rather like Marie Antoinette counselling the Paris mob to eat cake or Stephen Harper initially extolling the 2008 financial crash as a stock-buying opportunity, Flaherty is telling us that employer-sponsored defined-benefit pension plans would be safer if they could retain larger surpluses than the 10 per cent currently permitted under the Income Tax Act. Following advice from Ted Menzies, his point man on pension reform, Flaherty is proposing to let surpluses reach 25 per cent before tax law requires a contribution holiday.
Well, it’s a great idea. And if Menzies had suggested it a few years ago, when some plans had surpluses, we’d now be calling him Mr. Mensa and nominating his boss for a Nobel Prize in economics. But today it earns you a door prize in hindsight. The dwindling band of employers that offer pension plans do not have surpluses to enlarge. They have deficits, courtesy of the impact of the recession/buying opportunity on plan assets. Many face a challenge complying with the regulatory requirement to eliminate these solvency deficits within five years. The average deficit has been estimated at 20 per cent — a $50-billion shortfall for all plans. In every province, sponsors have been asking governments to allow them eight or even 10 years to eliminate deficits. For the seven per cent of plans under federal regulation, Flaherty offered temporary, conditional relief from the five-year rule in June. This week he had a chance to provide a longer-term solution and set an example for the provinces, which regulate most plans. It was an opportunity missed. Ottawa is retaining the five-year rule on deficits, though there will be relief in some cases in now allowing plans to use a three-year average deficit in calculating payments. For plans in serious distress, Flaherty is proposing a “workout scheme” whereby the plan stakeholders could negotiate a funding solution, subject to the finance minister’s approval. This would be triggered by a board of directors’ declaration that the sponsor can’t make its next deficiency payment.
In other words, no regulatory relief until the train wreck is a certainty. Surely it makes more sense to enable firms to manage deficiency payments, by stretching them out, before there is a crisis. Nova Scotia’s pension advisory panel has recommended a 10year amortization of deficits, as has Ontario’s. This should be the first pension priority for both levels of government. They should also act to make deficiency payments secured claims against company assets, to protect employees when firms go through bankruptcy or restructuring before a pension deficit is eliminated. But Flaherty has passed on this idea, too, saying it complicates refinancing. It does, but this doesn’t prevent Ottawa from giving priority to taxes and wages over other creditors. In the long run, it makes sense to promote larger pension surpluses as a margin of safety against market downturns and to recognize that temporary overfunding can quickly disappear. So raising Ottawa’s surplus cap could help plans weather the next storm. But right now surpluses are a far-off wish. What plans need is more time to repair deficits.