Dipac

Pension Plans-101

Following is a brief summary of pension plan issues currently receiving widespread media coverage.

News reports involving pension plans are currently at a peak with the future of companies such as General Motors and Nortel in the public eye. In these and similar cases, the issue of pension plan valuations, the state of funding and pension payments are key topics.

Often when such companies face major financial difficulties, pension plan under-funding is high on the list of problem items. In addition, in these cases this situation has been seriously escalated by the current economic crisis. This deterioration in pension funding for the most part is due to both asset mix and significantly lower investment returns. Since monies in pension funds exist under trust law, the fund is deemed to be protected from creditors should sponsor bankruptcy occur. However to the extent that any under-funding exists, there would almost certainly be an impact on pension payments should the sponsor cease to continue in business. As well, health and insurance type benefits would also be impacted.

The Ontario Pension Benefits Act (PBA) governs the pension plans of Nortel and GM, as well as a great many others, including that of INVISTA (Canada) Company.

The Act, and its associated Regulations, defines the on-going funding obligations to be met by the plan sponsor, the parameters to be used in forecasting the investment performance of the fund, and a variety of other administrative factors. This agenda of material was part of the focus of the Ontario Expert Commission on Pensions (OECP) study with its report released in October, 2008 resulting in 142 recommendations. This report clearly confirmed that governing laws and regulations are in serious need of upgrade. Your association, DIPAC, made a well-received presentation to the Commission in Kingston, and is currently involved in follow-up activities directed at promoting expedient implementation of the OECP report.

Federal legislation also plays a role in provincially regulated pension plans. Specifically Income Tax provisions limit the extent to which pension plans can become over-funded; for example, this sometimes results from investment returns better than forecast, or when plan actual pay-out obligations are less than anticipated. When this occurs, the PBA allows sponsors to take 'contribution holidays' until such time as the fund returns to a status consistent with the actuarially appropriate funding requirements.

Under existing PBA provisions, pension plans typically operate to a three year major valuation review cycle. However, as recent events have clearly demonstrated, much can happen within such a time frame. A combination of events comprised of contribution holidays, poor pension investments returns and difficult business conditions for the sponsor will undoubtedly result in a negative effect for the pension plan.  In a number of cases funds are currently reported or estimated to be under-funded by 30% or more. Since restoration of appropriate funding represents a major cost burden to the sponsor at a time when adverse business conditions might exist, much lobbying by sponsors is underway to extend the restoration time frame to as long as  10 years. The financial status of our fund is due to be reported 30/06/2009 which will report the status of the 'assets' as at Dec 2008 but not the liabilities. As for liabilities, the most current information available is from the last major valuation in June, 2007. Thus while we will have some ideas of our shortfall situation, it will still be an informed guess.

While the Pension Benefits Guarantee Fund (PBGF) is viewed by many as assurance that benefits are 'protected', in fact the PBGF delivers no protection unless an individual's pension falls below $1000 per month. In addition the PBGF is also reported to be in questionable financial health, and likely unable to deal with a number of major problems such as pension plans of GM's magnitude. While the Premier of Ontario recently stated that the PBGF will not be used for any plan bailouts, it is unclear how PBGF provisions might be denied under a plan fold-up situation which usually results with bankruptcy.

Current and future beneficiaries of Pension Plan #0242727, sponsored by INVISTA (Canada) Company, will be well served by the continued business viability of the sponsor. At the same time, your association believes it is critical that the recommendations of the OECP be implemented without delay. Improvements to the applicable laws, regulations and administration can only add to our confidence that our pensions are secure.

As mentioned at the recent DIPAC Annual General Meeting in Kingston, your association believes there is considerable merit in undertaking a 'letter writing campaign' where individuals make a personal appeal to their Ontario MPP requesting their support for a speedy implementation of the key OECP recommendations. When an MPP receives a notable volume of mail on a particular issue, he/she is inclined to take notice since this is a message from their constituents.  MORE INFORMATION ON THIS EFFORT WILL BE AVAILABLE SHORTLY.