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Ottawa moves up pension reform

Globe and Mail Update

Ottawa, Toronto — Under pressure to act on retirement security, the Harper government has moved up the timetable for some long-awaited reforms to federally regulated pension plans, but the measures don't include any relief for pensioners whose company has collapsed.

Finance Minister Jim Flaherty on Tuesday unveiled his proposed changes, which include rewriting tax laws to encourage both federally and provincially regulated companies to run bigger pension fund surpluses. The Conservatives are looking to change tax law so that companies are allowed to run surpluses of as much as 25 per cent instead of the current 10 per cent level. This cap exists to limit federal tax revenue lost on the tax-deferred pension contributions.

However, much of the reforms only address the workplace pension plans of federally regulated industries – including telecommunication companies and airlines – that comprise about 12 per cent of overall private sector employee plans in Canada by assets.

Ottawa is also proposing to change the rules for federally regulated industries to require that they continue to contribute to workplace pension plans unless they are running a surplus of at least 5 per cent. Under current rules, federally regulated companies can take a “contribution holiday” as long as the plan has no deficit.

“The practice of taking contribution holidays was widespread in the past and has been a contributing factor towards the under-funding of pension plans during the past several years,” the Finance Department said in a release.

The government also wants to restrict companies' ability to sweeten benefits unless its workplace fund has a 5 per cent surplus.

Plus, it plans to require federally regulated companies that voluntarily wind up pension plans to pay out all the benefits they owe their workers, prohibiting plans from shutting down with large deficits.

Tuesday's announcement only deals with reforms to federally regulated pension plans and doesn't address the larger debate taking place about the retirement savings crisis. Ottawa still faces calls to introduce compulsory or voluntary schemes that would compel Canadians to save more for their retirement following revelations that many are ill equipped after life in the work force.

The Tories had originally planned to release these federal pension reforms by December, but Mr. Flaherty decided to release them Tuesday. In recent days, the opposition NDP and Liberals had begun to ramp up pressure for action on pensions.

“People want answers,” one federal official said, by way of explanation.

Pension experts warned Tuesday that many of the new reforms will have virtually no impact. They say most pension funds do not have a surplus that could now be enlarged under the new rules, and they argue the wind-up changes merely close a loophole that has rarely been used.

“These two changes are fundamentally irrelevant,” argued pension specialist Mitch Frazer, a lawyer at Toronto law firm Torys LLP.

Mr. Frazer said provincial pension rules already forbid financially healthy companies from voluntarily winding up a pension plan that is in a deficit position and walking away from the problem.

Federal laws have not had the same prohibition for the small minority of federally regulated plans, and the changes will fix the anomaly. But Mr. Frazer said he doesn't know of any healthy company that has taken advantage of the loophole in the past to abandon a plan with a deficit.

More critically, he said the reform will not address the far more common problem of under-funded plans being wound up in bankruptcy, leaving retirees facing sharply reduced pension payments.

“It doesn't have any meaningful impact on bankruptcies, which is where the problem is,” he said.

Pension lawyer David Vincent of Ogilvy Renault LLP said unless the federal government also plans to change the law to allow companies to extract excessively large surpluses from their pension plans – a move that is almost impossible under current rules –firms will continue to avoid building up any surpluses in their pensions.

As a result, he said, few, if any companies will take advantage of a change allowing surplus assets in pension plans to grow from 110 per cent of liabilities to as high as 125 per cent.

“If the government really seriously wanted to create an incentive for companies to, in effect, over-fund their pension plans ... increasing the tax limits will not allow them to do that,” Mr. Vincent said.

“Ever since the withdrawal of surplus became controversial, most companies have tried to carefully manage their funding of their plans.”

The government since January has been consulting companies and other players in the pension industry on proposed changes.

Ottawa and the provinces face increasing pressure to modernize a fragmented pension system that is seeing thousands of retirees stranded with shredded pensions as the downturn has pushed more companies into bankruptcy protection. The impact of the recession has exacerbated the straining pensions of many companies with aging work forces and growing numbers of retirees, and has left private-sector pensions under-funded by an estimated $50-billion.

Amending income tax laws is not expected to trigger any tax revenue losses in the near future because most of the country's pension funds are so under-funded that it could be years before employers are in a position to invest surpluses into their plans.

Other reforms being unveiled by Mr. Flaherty include changes to allow pension plan participants to negotiate changes to their pension arrangements.

The Tories have dismissed calls for Ottawa to step in and offer a backstop for pension plans, arguing this would create a “moral hazard” that could spur companies to take undue risks because of insufficient consequences for failure.

“We talk about protecting pensioners. But we've also got to protect taxpayers,” Mr. Menzies said recently.

The combined impact of the global financial crisis, poor fund management and the growing ranks of longer-living retirees has saddled most of Canada's pension plans with crushing deficits.

Watson Wyatt Worldwide, a pension consulting firm, estimates the average Canadian corporate pension plan is 20 per cent short of assets needed to fund long-term pension obligations. The firm estimates this solvency deficit has left a $50-billion hole in corporate pensions funds.

Critics of calls to allow companies to run up bigger surpluses argue that changing the rules would have little effect because shareholders, particularly of publicly traded companies, would likely resist allocating extra money to employee benefits.

As it stands today, the minority Harper government needs the support of 12 opposition MPs in order to obtain a majority to pass a pension reform bill through the Commons. By-elections on Nov. 9 could slightly change this calculation.

Federal political parties are scrambling to stake out turf in the debate over the retirement-savings crisis this week, with the opposition Liberals vowing they'd take a more activist role than the Harper government and Conservatives warning against costly new schemes.

Liberal Leader Michael Ignatieff, his party lagging in the polls behind the Tories, held a roundtable Monday on the country's crumbling private pension system. He suggested he'd expand the Canada Pension Plan, a vehicle that's financed from the pockets of employers and workers.

“That basic commitment that Canadians make to each other about a secure and dignified retirement is now in some question,” Mr. Ignatieff told the Ottawa forum.

“There is a widespread feeling ... of insecurity.”

Ottawa and the provinces also face calls to intervene far more broadly in Canadians' retirement-savings behaviour, such as enacting new compulsory or voluntary schemes that would steer people toward building bigger nest eggs.

The NDP, which is propping up the minority Harper government, last week proposed that Canadians be forced to buy pension insurance as part of a package of suggested reforms to tackle the problem.

The Tories are proceeding cautiously on the bigger question of inadequate savings, wary of committing Ottawa to any new programs. In May, Mr. Flaherty agreed to study retirement security with the provinces, and reports on this are due before mid-December, when he and his counterparts meet in Whitehorse.

Mr. Flaherty Monday accused the Liberals of jumping on the bandwagon late and offering what he called a “knee-jerk reaction to a serious issue.”

Mr. Menzies, Ottawa's point man on pensions, said Monday he doesn't want to prejudge whether the federal government sees a leadership role for itself on the security issue.

He warned against new programs that would saddle taxpayers with big obligations, saying some countries now find themselves unable to afford more elaborate schemes.

“They put in place a system of paying [for] all retirees, but they never put in a system that was adequately set up to pay for it. So they're in a huge deficiency right now.”

The Liberals are still drafting their pension platform, but Mr. Ignatieff floated the idea of supplementary savings schemes tied to the Canada Pension Plan, or giving the plan's managers additional responsibility for “retirement security.”

Mr. Menzies said a research working group assembled by Ottawa and the provinces in May is studying how the adequacy of retirement income in Canada compares to other countries, among other things.

A key question Mr. Flaherty and his provincial counterparts will face is whether efforts to boost savings will be compulsory or voluntary. Critics of voluntary incentives – such as registered retirements savings plans – say these have failed to generate sufficiently large nest eggs for Canadians.

Liberal finance critic John McCallum said his party will provide its own proposals within a month or so, and these could include expanding the Canada Pension Plan, more tax incentives for savings, and prioritizing pensions in the event of bankruptcy.

“We believe in a major role for the federal government in this area,” he said Monday.

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