So­lu­tions for pen­sion re­form: just add sur­pluses

The Guardian (Charlottetown) - - Opinion -

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.

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