Quebec's offer this week to protect pensions when companies go bankrupt will not guarantee full payouts for workers and should require no cash contributions on the part of the government, according to a pension consultant who worked on the new program.
Michel St-Germain, a partner at pension consulting firm Mercer in Montreal, said workers need to understand that the Quebec government is not intending to make up shortfalls in pension plans when companies fail.
“The reality is pensions will not be increased – it just gives breathing room,” he said.
The program will give pensioners the option of having the Quebec Pension Plan take over management of their assets for a five-year period if their pension fund is insolvent.
The government will not contribute money to make up any shortfalls in pensions at the time of the bankruptcy, but will guarantee that pensioners receive at least their reduced pension levels as measured at the time of the insolvency.
For example, if a pensioner were eligible to retire with a $1,000 monthly pension, and the company's pension plan is so underfunded at the time of insolvency that their pension is cut to $700 a month, the Quebec government has pledged to guarantee that $700 level of payment for five years.
Quebec Employment Minister Sam Hamad said yesterday that the minimum payment level could rise if the pension manager is able to earn excess returns by investing the pension assets successfully.
“Any additional profit we get will be returned back to the retirees,” he said.
Mr. Hamad said the Quebec government was not willing to offer a full pension guarantee to workers because it could require extremely large payments when companies are bankrupt. He noted that Ontario's Pension Benefit Guarantee Fund, which guarantees employee pensions to a maximum of $1,000 a month, is risky because a large bankruptcy will require high government contributions.
“We have to keep people responsible,” he said. “They are private pension plans.”
Mr. St-Germain said the Quebec program was created because the market for annuities in Canada is limited, especially during the economic downturn.
Typically, pension administrators buy annuities to guarantee a steady monthly income for retirees when a pension plan is wound up. But Mr. St-Germain said annuities are difficult to buy right now.
“You need to purchase annuities in a short period of time,” he said. “It's impossible to buy annuities for a large group. ... The market is just too thin.”
He said the five-year program will provide more time and avoid the need to buy annuities at steep current prices.
He said the intention is that the money in the program will be invested conservatively in bonds to ensure the government will not lose money and have to contribute cash to make up a shortfall.
“This is supposed to cost zero to the Quebec government and the Quebec taxpayers,” he said.
As for the likelihood of additional profit, pension lawyer Michel Benoit of Osler Hoskin & Harcourt LLP in Montreal said he isn't confident the government can manage money conservatively and still earn excess returns to improve underfunded pensions.
“I've never seen a government invest money that would be a benefit to you,” he said.
Martin Rochette, a pension lawyer at Ogilvy Renault LLP in Montreal, said the far more significant part of the relief package is the government's pledge to give companies an additional five years to make up shortfalls in their pension plans.
The provision is similar to relief offered already by the federal government and by some provinces, including Ontario. But Ontario has required companies to get employee consent to extend pension funding, requiring complex notification and education efforts. Pension experts have warned that few companies will use the relief.
Mr. Rochette said many Quebec companies will take advantage of the offer because the program is easy to use.