Pamela Wallin, Chair
Standing Committee, Banking, Commerce and the Economy
Senate of Canada
Dear Ms. Wallin,
I am writing in my capacity as Chair of the Expert Panel on Income Security of the Council on Aging of Ottawa. (Brief Biographical notes on the members of the Panel are provided in the Appendix). I am writing to you at this time in your role as a member (Chair) of the Standing Senate Committee on Banking Commerce and the Economy. This note concerns Bill C-228 which is before the Committee.
I want to begin by acknowledging that Bill C-228 will increase the benefit security of plan members who belong to workplace defined benefit pension plans in cases where their employer becomes insolvent. It is a step forward for pension fairness.
But Bill C-228 creates a real dilemma. On the one side, the members of surviving defined benefit plans will have increased protection – but not complete protection – when the employer/sponsor of their defined benefit plan becomes insolvent. On the other hand, as Committee members have been warned, there is also reason to believe that Bill C-228 may contribute to the further decline in coverage of defined benefit pension plans. Members of the defined benefit plans that are closed in response to Bill C-228 will be forced to rely on means of saving for retirement that are typically less effective.
This dilemma – one of so many in the retirement income field – creates a difficult choice between better supporting the members of defined benefit plans whose plan sponsor becomes insolvent versus the losses faced by those members who will be deprived of defined benefit coverage if the plan sponsor chooses to terminate their defined benefit plan.
This policy choice would be difficult under any circumstance. But the choice is especially difficult given that, as far as we are aware, there are no analytics in the public domain that would help in understanding the consequences of the choice. Important bills, like Bill C-228, should not reach the stage of passage that Bill C-228 has reached, without there being substantial analytical support in the public domain so the Members of Parliament (MPs) and the public at large can understand their consequences.
Despite our empathy for the objectives of Bill C-228, our preference would be to delay its adoption until appropriate analytics are in the public domain. Barring that, and noting that the provisions of Bill C-228 will only take effect in four years, we would urge that the analytics and related research in response to issues raised below be undertaken even after the passage of Bill C-228.
The issues addressed in what follows are:
- What will be the impact of Bill C-228 in Ontario
- Threats to defined benefit plans that may be created by Bill C-228
- Two high profile complements/alternatives to Bill C-228
- Additional complements/alternatives to Bill C-228
- Some thoughts about Bill C-228 in the context of its place in the Canadian retirement income system
I will state views on these issues rather briefly – in some cases because I know you have heard about them from other sources. I should note too that the issues raised here are quite high-level conceptual issues. We have received legal advice to the effect that the Bill also needs a legal scrubbing as it leaves some important issues in an ambiguous state. For example, it is not clear from the current wording how the Bill will apply to the bankruptcy of a participating employer in a multi-employer pension plan.
Bill C-228 in Ontario
The impact of Bill C-228 in Ontario may be different than in other provinces as Ontario has operated a defined benefit insurance scheme since 1980. The scheme is administered by the Pension Benefits Guarantee Fund (PBGF).
Subject to specified limitations, the PBGF tops up defined benefit promises for members of defined benefit plans when the plan sponsor becomes insolvent and the assets in the pension fund are not sufficient to cover all benefit promises. Despite the limitations on payouts, the insurance is sufficiently robust to have paid, on average, 96 cents on the dollar owing to Ontario participants in the Sears pension plan when Sears became bankrupt.
On the face of it, it would appear that the main effect of Bill C-228 in Ontario may be to reduce the financial burden on the PBGF by increasing the funded status of the defined benefit plan of insolvent plan sponsors.
Bill C-228 should not be crafted based solely on its impact in Ontario. But the question of its impact in Ontario is still a relevant question that needs an answer. Ontario accounts for just under half of defined benefit plans and defined benefit plan members in Canada.
Threats to the future of defined benefit plans
Other organizations have alerted you to the possible negative unintended consequences of Bill C-228 – most notably the Association of Canadian Pension Management (ACPM). The qualitative scenario to which they allude is real. Bill C-228, by lowering the effective capital in the firm, will raise the perceived risk of loans to the firm and may raise the borrowing costs and conditions for sponsors of defined benefit pension plans. In turn, this may cause plan sponsors to drop their defined benefit plans. Bearing in mind that others have dwelt on this issue at some length, there is no need to dwell on it here. However, I will add two further points:
- Much of the commentary you will receive on the impact of Bill C-228 will talk about the impact on private sector defined benefit plans as if the impact of the Bill will be similar across all private sector defined benefit plans. But a uniform response across all private sector plans is unlikely. Impacts will be uneven based on a number of variables including: the degree of indebtedness of the firm, the credit rating of the firm, the funding ratio of the firm’s pension plan and the risks associated with the actuarial assumptions used to value the pension plan assets and especially its liabilities.
- In addition to the impact on private sector firms, some attention should be paid to possible impacts on public sector entities that have defined benefit pension plans and that borrow on their own account. Municipalities east of Ontario that sponsor defined benefit plans at the level of the individual municipality and crown corporations come to mind as warranting attention.
As noted above, there is nothing in the public domain that would help compare the gains of some defined benefit plan members in terms of increased security of defined benefit promises, with the loss of defined benefit membership.
Two high profile complements/alternatives to Bill C-228
As Bill C-228 now stands, it would appear that as soon as an insolvency is declared, a settlement with the pension plan is triggered in which assets of the insolvent are transferred to the pension fund and the fund is distributed to plan members who must use the proceeds to buy annuities. Compared to the status quo, Bill C-228 helps by increasing the plans’ funded status. But the Bill C-228 solution creates the problem that annuity prices are generally higher than the cost of maintaining defined benefits on a going concern basis.
The ACPM has pointed out correctly that there may be ways of avoiding this annuity price problem. The ACPM has suggested the use of third-party trustees acting under the guidance of pension regulators as one alternative, and solvency workouts for plans as another approach. Subject to an important caveat, these “alternatives” are helpful suggestions.
It is not clear why the “alternatives” proposed by the ACPM preclude the Bill C-228 solution rather than serving as compatible complements to it.
Casting the proposals as an “alternative” conflates two distinct issues:
- what money, if any, will be transferred from the estate of the insolvent to the pension fund, and
- how will the fund be distributed.
The “alternative” proposed by the ACPM addresses the latter question but not the former question. The alternative proposed by the ACPM could be reconciled with Bill C-228 as long as there is time after the declaration of insolvency for stakeholders to decide on the best way to distribute the pension fund – annuities versus the “alternatives”. The “alternative” approaches, like the Bill C-228 solution, would benefit from the assets transferred to the fund under Bill C-228.
If coupled with the provisions of Bill C-228, these alternatives require a measure of plan member support. In the case where plan members are unionized, it is clear where the voice of plan members comes from. Whether an acceptable means of plan member support can be found in non-unionized situations needs study.
Additional complements/alternatives to Bill C-228
Other organizations have drawn your attention to some alternatives and/or complements to Bill C-228. Here we add some additional food for thought.
An ethical and financial problem can be created if firms approaching bankruptcy make decisions to run down remaining assets by making special payments to executives, directors and shareholders. Any “special” or “unusual” payments to any of these groups should be recoverable by the pension fund if made within a specified time period before the application to be declared insolvent.
In principle, a more complete realization of defined benefit pension promises than that provided by Bill C-228 could be accomplished by a program of defined benefit pension insurance. Programs of this sort exist in Ontario, the US, and the UK. These programs have their own problems. But the Ontario program arguably goes much further in protecting defined benefit pension promises than will Bill C-228. If there is an appetite to assess alternatives, the extension of these programs to other Canadian jurisdictions merits study.
A tightening of ongoing funding requirements for defined benefit plans so they are always closer to being fully funded on a windup basis could also be considered. Theoretically, this is an obvious alternative. But the solvency requirements introduced starting in the late 1980s in Canadian jurisdictions contributed to this objective but also ended up contributing to the decline in defined benefit pension participation. Caution is required in this area.
Two questions to reflect on
Bill C-228 and our commentary to this point, accept that any adjustment to accrued defined benefits in insolvency will be of the same proportion across all defined benefit plans members (e.g., a five per cent reduction for all). But the Committee may want to give some consideration to whether the benefits of retirees and near retirees deserve greater protection than those of younger members.
The committee might also give some thought to whether Bill C-228 creates a different regime for dealing with insolvencies than exists in other countries and if so, does this inhibit international investment flows in a way that might cause concern.
Bill C-228 in context
Canada’s retirement income system has been designed on the assumption that workplace pension plans will play an important role in helping people with moderate to high earnings maintain their standard of living in retirement. Success in meeting this objective has been modest and recent trends are worrisome. The portion of employed Canadians who participate in workplace pension plans is lower today than it was fifty years ago, and whereas fifty years ago most participants in workplace pension plans were in defined benefit plans, only a minority participate in defined benefit plans today. We draw your attention to this reality to highlight the point that as important as the issue addressed by Bill C-228 is, it is of minor significance compared to the ongoing problem of the quantity and quality of participation in workplace pension plans in Canada. Further enhancement of the Canada and Quebec Pension Plans needs to be considered as a possible remedy for the participation problem just noted, and as a way of providing more secure benefit promises for pension plan participants.
The issues to which Bill C-228 gives rise are complex. I have tried to address them as briefly as possible. In having done so new complexities and ambiguities may have been created. With that in mind, I would be pleased to address any issues you might wish to raise – including sources of data and analytics that might help in addressing the concerns we have raised above. By the end of February, we will have pulled together a list of the issues that need to be addressed by data and analysis. We would be happy to share this with any of you who are interested.
Sincerely yours, Supported by the Council on Aging Board
Bob Baldwin, Chair Alex Roussakis, President
Expert Panel on Income Security Board of Directors
cc: Colin Deacon, Deputy Chair
Paul J. Massicotte
Donald Neil Plett
Larry W. Smith
Yuen Pau Woo