Just when it looked like provincial funding reform was going to slow the decline of private sector defined benefit pension plans in Canada, the federal government has thrown a wrench into things with Bill C-228, says Jason Vary, president of Actuarial Solutions Inc.
Just when it looked like provincial funding reform was going to slow the decline of private sector defined benefit pension plans in Canada, the federal government has thrown a wrench into things with Bill C-228, says Jason Vary, president of Actuarial Solutions Inc.
Despite all the doomsayers’ warnings of unintended consequences, he says ‘Bill C-228 the Pension Protection Act’ is now law. It amends the ‘Bankruptcy and Insolvency Act’ and the ‘Companies’ Creditors Arrangement Act’ to ensure that claims in respect of unfunded liabilities or solvency deficiencies of pension plans are given super-priority in the event of bankruptcy proceedings.
However, Vary wonders if this will kill off the Ontario Pension Benefits Guarantee Fund (PBGF). This fund protects members and beneficiaries of certain single employer defined benefit pension plans in the event of an employer's bankruptcy, paying up to $2,550 monthly. It is funded through assessments on plans.
“Since the new act will greatly enhance the security of the benefits provided by the DB pension plans that survive, there will be far less need for the protections provided by the PBGF. Hopefully the Ontario government is paying attention and will revisit the cost/benefit analysis of maintaining the PBGF,” he says.
The PBGF tends not to work for a bunch of reasons. “It's Ontario only, which is problematic because many pension plans have employees across Canada. When a company like Sears goes bankrupt, the Ontario people get treated differently than the rest of Canada. It doesn't make sense,” he says. If the bankrupt company really has nothing left, then there still could obviously be a deficit left over even if 100% of the proceeds of the bankrupt company go into the pension fund and the PBGF would have to step up. However, there's going to be “a lot fewer claims down the road which makes the arguments for having it even weaker now.”
As well, in some cases, a company is just too big to fail. When Stelco failed in 2007, the deficits from its pension plans would have bankrupted the PBGF. Since the government was “over a barrel,” special treatment was negotiated. In fact, many opponents of the super-priority bill ‒ including the Pension Investment Association of Canada (PIAC) and the Association of Canadian Pension Management ‒ held it up as an example of a situation where the pension fund was taken over and managed with the result retirees received their benefits. This argument suggested the need for super-priority was minimal.
Pension funding reform across the country has also alleviated concerns about pension deficits. The move from solvency to going concern funding has had an impact. Ontario, for example, no longer requires 100% solvency funding. “So, you've increased the likelihood that there will be a solvency deficit because the going concern fund rate now targets only 85%. If a company goes bankrupt, on average they will be 85% funded, not 100% funded. On that basis, there's more risk for PBGF,” he says.
Still with interest rates going up and “okay” investment returns, the average plan today is “actually fairly well funded. So if a company goes bankrupt today, chances are that the plan actually has 100 cents on the dollar, if not a little bit of surplus,” he says.
While it’s generally reported that the new super-priority act won’t take effect for four years, “that’s not quite true. The four-year transition period only applies to DB pension plans that existed before April 27, 2023. The new law is fully effective for any new DB pension plans established on and after that date. “Admittedly, very few new DB plans are created these days, but it is possible,” he says.
