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CAW-Canada's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:


September 15, 2005

Introduction

The National Automobile, Aerospace, Transportation and General Workers Union of Canada (CAW-Canada) represents 260,000 members across Canada. About 30,000 of our members work under federal jurisdiction. Over half of these members are in defined benefit plans with employers such as Air Canada, VIA Rail, CP Rail, CN, Nav Canada, and St. Lawrence Seaway.

Context

Consultation Should Review Canada's Retirement Income System

The CAW-Canada appreciates the opportunity to comment on the financing of defined benefit pension plans. The Department of Finance states that the ultimate goal of the consultation is to amend the pension legislation to "improve the security of pension plan benefits and ensure the viability of defined benefit pension plans." The Consultation Paper seeks to balance the interests of plan members, who want secure benefits, against the interests of plan sponsors, who want relief in funding defined benefit plans.

The funding issue is important and timely. The CAW-Canada is, however, disappointed that Finance has set such a narrow focus for the consultation. Finance's consultation will create the framework for the discussions on pensions across Canada. This is an opportune time for Finance do a much-needed review of Canada's retirement income system.

Statistics Canada (2001) reported that almost half of Canadians between the ages of 45 - 64 will not have sufficient income to retire at age 65.[1] The statistics are troubling but not surprising. The Consultation Paper describes the three-tier retirement income system in Canada: the responsibility for retirement income is shared among government, employers, and individuals.

In theory, Canada's system is sensible and balanced. In practice, the employer is dropping out of the system. The percentage of private sector workers with defined benefit pensions dropped from 29 percent in 1992 to 21 percent in 2003 (Statistics Canada, 2003). When defined contribution pensions and other types of plans are included, only 28 percent of private sector employees even have a pension plan (down from 34 percent in 1991). Given that 70 percent of private sector workers have no employer pension plan, it is not surprising that a great number of Canadians are not financially prepared for retirement.

The Consultation Paper refers to some minor changes in the public pension system (i.e., increase in GIS, investment options for CPPIB) and the increase in foreign investment for RRSP funds, but these changes do not begin to address the retirement needs of Canadians. The CAW would like to see the federal government look at the growing problem of inadequate retirement income and consider alternatives to voluntary employer-sponsored plans. One alternative would be the expansion of the public pension system.

If employers are saying that a defined benefit plan (or any pension plan) is too onerous, then surely this is the time to explore a role for employers in funding an expanded CPP/QPP. The CPP/QPP have some excellent features for employers and employees: low administration fees, secure funds, stable and predictable contribution levels, portability, childrearing provisions, and 100 percent inflation protection. Most important, the CPP/QPP provides virtually complete coverage for Canadian workers.

Finance has missed an opportunity to open a dialogue on the retirement income system for Canadians. However, the issue of funding defined benefit plans is important, and we now turn to the proposals in the Consultation Paper.

Funding Defined Benefit Plans

Balancing the interests of plan sponsors and plan members

Finance has taken on the difficult task of offering funding relief to plan sponsors without jeopardizing the security of plan members' benefits. Finance seems to be responding to assertions from plan sponsors that unless they get funding relief, they will convert to defined contribution plans or abandon pension plans altogether.[2]

Plan sponsors seek legislative changes to reduce funding requirements and to give sponsors greater access to surplus funds. Sponsors claim that defined benefit plans present an "asymmetrical risk" whereby the sponsor must fund any shortfalls but does not have access to any surplus.

The CAW-Canada acknowledges that many plan sponsors are currently faced with increased obligations to fund pension plans. Union negotiators are often confronted with employer pension costs, and it becomes difficult to bargain monetary gains for our members. And the CAW is also concerned that members' pensions be adequately funded, particularly if there is a wind up.

The CAW-Canada very clearly understands the issues around funding defined benefit pension plans. We do not, however, readily accept some of the employers' arguments for funding relief, in particular, that the employer bears an unfair burden of risk in plan sponsorship. Plan sponsors' threats to convert to defined contribution plans if they do not get funding relief only add hostility to the bargaining process.

The CAW-Canada's experience at Air Canada tells us that Canadian workers value their defined benefit pension plan and will not give it up without a fight. In 2004, Air Canada needed to secure a major investment to emerge from bankruptcy protection. Trinity Time Investments demanded that the employees accept a defined contribution plan as a condition for their investment in Air Canada. The employees were at their most vulnerable, yet they refused to accept the conversion and, through their unions, successfully fought to keep their pension plan. Air Canada can stand as a test case for plan sponsors contemplating conversion from defined benefit to defined contribution: Employees will resist concessions in their pension plans.

The CAW-Canada does not accept the "asymmetrical risk" argument for employers funding defined benefit pension plans. From a union perspective, it is hard to see the asymmetry when employers have been enjoying the benefits of pension surpluses over the past 20 years. In fact, in the 1980s employers lobbied against an expanded public pension system and insisted on the right to maintain workplace pension plans. The workplace plans had surplus funds, and employers took full advantage of using surplus to fund contributions.

Nor is it not true that only employers bear risk in defined benefit pension plans. The actuary, Keith Ambachtsheer, challenges this premise in a paper prepared for the C.D. Howe Institute (2004). Plan members, he points out, give up immediate wage increases for future pension benefits which a) may not be of equal worth at retirement date, b) may be eroded by post-retirement inflation, or c) may be lost in a bankruptcy or substantially reduced in an early termination of employment.

In the CAW-Canada's bargaining experience, the employer may absorb the initial cost when market conditions adversely affect the pension fund, but the employer will always pass that cost along in subsequent wage and benefit negotiations. And it is reasonable for the employer to absorb that initial cost. The employer has the financial assets to deal with fluctuations in the market; individual employees earning $50,000 or less a year do not.

The CAW-Canada does not accept the arguments that employers bear an asymmetrical risk in funding defined benefit pension plans. We do, however, see some plan sponsors faced with heavy funding obligations; and we support measures for funding relief which would not jeopardize the security of the pension benefits. We also think that it is extremely important to note the temporary nature of pension funding shortfalls. The market conditions which led to pension shortfalls for some defined benefit plans are improving. Even plan sponsors who demand immediate funding relief anticipate large surpluses accruing in the next few years. We ask Finance to consider temporary funding relief with cautionary measures to protect member benefits.

The proposals in the Consultation Paper try to address the plan sponsors' interest in stable, moderate funding levels and the members' interest in benefit security. The proposals seem to split according to the two interest groups. Plan sponsors are interested in access to surplus, extending the period for funding solvency deficits, and funding deficits through letters of credit. Plan members see merit in full pension funding on wind up, a pension benefit guarantee fund, and the disclosure of information on corporate viability and pension funding.

We will discuss each proposal as presented in the Consultation Paper but ask Finance to recognize the inter-connectedness of the proposals. For example, any relaxing of solvency funding rules should be co-ordinated with the terms of a pension benefits guarantee fund. The final package of recommendations must be comprehensive to ensure a fair balance between the interests of plan members and plan sponsors.

Issues for Discussion

A. Surplus

The Government of Canada is seeking views as to whether there are any disincentives or obstacles preventing plan sponsors from adequately funding their plans and building up a funding cushion.

Finance suggests that employers are reluctant to fund a "cushion" in the pension plan because a significant change in conditions could create a large surplus which the employer cannot access. As well, Finance proposes that the Income Tax Act (ITA) limits on funding surplus pension plans may serve as a deterrent to building a cushion.

The CAW reviews many actuarial valuations. In our experience, employers fund the minimum requirement because they prefer to invest available cash in the business operations. Employers have almost always drawn on surplus to cover contributions; thus, raising the ITA limit for taxable pension contributions may not spark a large flow of funds into pension plans.

The CAW supports measures to increase the ITA limits for surplus accrual in pension plans. Such a measure would give greater flexibility to employers who wish to fund plans which are in a surplus position.

The Government of Canada is seeking views on whether the dispute settlement mechanism for surplus distribution contained in the PBSA requires improvement or clarification.

The dispute settlement mechanism in the legislation requires two-thirds of members and two-thirds of former members to consent to surplus distribution on a wind up or going concern basis. If less than two-thirds but at least half of each group consent, the employer may take the issue to arbitration. If the plan is winding up, they must take the issue to arbitration. The union has the right to represent active members at the arbitration.

The CAW has not had experience with the dispute settlement process. We are pleased to see the union recognized as the party representing active members at arbitration. We would like to see the union also recognized as the party representing active members on the initial consent for surplus distribution. The union is likely to negotiate the proposal for surplus distribution. Furthermore, the union likely has the historical records on whether or not the employer is entitled to the surplus (a condition for the refund of surplus).

Distribution on Partial Termination

The Government of Canada is seeking views on whether there should be partial plan terminations under the PBSA and if so, should there be a requirement to distribute surplus at the time of the partial termination.

The Consultation Paper points out that the Office of the Superintendent of Financial Institutions (OSFI) currently recognizes immediate vesting for members in a partial termination, but the members must wait for a full plan termination before any surplus is distributed.

The Consultation Paper proposes that one option is "to confirm OSFI's current interpretation of the PBSA that the rights assigned to persons affected by a partial plan termination do not include the distribution of surpluses at the time of the partial termination." In light of the Monsanto decision from the Supreme Court of Canada (SCC), it would seem that OSFI's interpretation was not correct and there are a number of partial terminations that must be revisited.

The CAW does not support the elimination of partial wind ups. The partial wind up serves an important purpose in that affected members gain full vesting and those members eligible for retirement have the option of taking their pension in a lump sum payment.

Finance asks if surplus should be distributed in a partial wind up. As the SCC pointed out in the Monsanto decision, it is inopportune for a pension plan member in a partial wind up to have to wait for a full wind up before receiving surplus entitlement. When the plan member loses their job, they are in greatest need of financial assistance.

The Consultation Paper presents the funding issue from the perspective of some plan sponsors. In their view, funding the plan conservatively could lead to a surplus on a partial wind up. Thus the plan sponsor has given too much and plan members are the winners.

The union holds a different perspective. Plan members also "give" when the plan is funded in a conservative manner. The employer will restrict wage and benefit improvements to offset pension contributions. Thus, plan members have also contributed to the surplus in the pension plan. Furthermore, in a partial wind up where the employer is downsizing in order to improve profitability, whereas the employee faces unemployment and needs immediate financial assistance.

In a paper discussing the Monsanto decision, the actuarial firm Watson Wyatt (2004) expressed concern that plan sponsors will want actuaries to eliminate margins of safety in calculating funding obligations. Watson Wyatt claimed that downsizing is inevitable yet the timing is unpredictable; thus employers are, in the view of Watson Wyatt, in a dilemma as to whether or not to fund a cushion. While it may be morally correct and prudent to fund a cushion, the actuarial firm saw employers being unfairly punished in a downsizing, where any surplus would go to the employees.

The CAW believes that employers have more control over their business operations than Watson Wyatt suggests. Even so, employers can and do include the value of the surplus when calculating the total severance package for terminated employees. The union and company generally negotiate severance packages for members, taking the value of surplus in a partial wind up into account. Presumably, in a non-union workplace, the employer will also apply the same calculations.

Partial terminations serve a useful function for plan members and any surplus funds should be distributed at the time of the partial wind up.

B. Funding

Finance asks respondents to consider options for greater flexibility in funding solvency shortfalls and to consider the conditions for allowing such flexibility. For example, Finance asks if solvency funding should be extended from 5 to 10 or 15 years for companies in bankruptcy protection. And then asks if the extension should also apply to solvent companies.

The questions are relevant but difficult to answer. The CAW believes that such questions should be addressed in a broad public policy discussion with various interest groups participating. The discussion could recommend the appropriate forms for relaxed funding, the conditions to qualify for relaxed funding, and the process for approval. As noted above, the current period of funding shortfalls will pass. It is rash to make major, permanent legislative changes for funding relief to accommodate a short-term situation.

For this brief, the CAW holds that any new options for flexible funding should be done on a case-by-case basis and would require the approval of the Superintendent of Financial Institutions, the bargaining agent, and the retirees. (If there is no bargaining agent, the proposal would require the support of a member representative and/or the active members.)

Having suggested funding flexibility on a case-by-case basis, we do have serious reservations about letters of credit and special accounts. We list these concerns below.

Letters of Credit

The Government of Canada is seeking views on whether there are alternative financial vehicles, such as letters of credit, that could allow for greater funding flexibility. What types of conditions or rules should be required if greater funding flexibility is given to plan sponsors, to ensure that the risk to benefit security is minimized?

In September 2003, the CAW dealt with the issue of letters of credit to cover solvency obligations. The BC Superintendent of Financial Institutions rejected Butler Brothers Supplies Ltd in Victoria, B.C. proposal to obtain a letter of credit to cover the solvency deficiency. The CAW supported the Superintendent's position at the BC Court of Appeal. The court ruled that a letter of credit did not comply with the provisions in the legislation for solvency funding.

The Consultation Paper is proposing to amend the federal legislation such that a letter of credit would be an acceptable form for solvency funding. While the BC case only considered whether the letter of credit complied with the legislation, the CAW noted the dubious wisdom of letters of credit for pension plan funding. In the CAW Factum, legal counsel quoted from Sagnar, Larna, Letters of Credit: The Law and Current Practice, 3rd ed. (1991) at p. 363:

Those who choose to sail through the uncertain waters of letters of credit, must do so largely without such navigational aids as precise terminology, clear rules of law or even a sound foundation in legal theory. Terminology is used in an inexact manner, and even the nature of the obligation assumed by the parties to a letter of credit transaction is a matter of uncertainty. For instance, it is clear that a letter of credit is a kind of payment undertaking, but the precise legal nature of that undertaking is a matter of some debate.

Letters of credit, in their current form, raise many questions aside from their compatibility with pension legislation. The financial institution that issues the letter of credit must be in good standing and have an arm's length relationship with the employer. The fees can be quite high depending on the credit worthiness of the plan sponsor; it is troubling to think that a financial instrument which weakens the plan's solvency and is entirely for the benefit of the plan sponsor could also be funded from the pension fund. Furthermore, the pension fund is losing the interest which would have accrued on the funds ear-marked with a letter of credit.

Extending the 5-Year Solvency Funding Period

The Government of Canada is seeking views on what the appropriate amortization period is and whether it is different for financially vulnerable and financially strong companies.

The Government of Canada is seeking views on what types of conditions or rules should be attached to any extended amortization period for solvency funding for companies under CCAA or BIA.

The Consultation Paper asks if companies under CCAA protection should be granted an extension on the 5-year funding term for solvency payments and if so, what the conditions should be for such an extension. The Consultation Paper than goes on to say that if companies that are not financially viable can apply for funding relief, then perhaps those companies that are financially stable should have an option for such relief as well. The Consultation Paper notes that Quebec has proposed to offer a 10-year amortization period under certain conditions and New Brunswick does offer an extension up to the year 2019.

The CAW was part of the Pension Beneficiaries Group (PBG) at Air Canada that negotiated the proposal for 10-year solvency funding. OSFI recommended the proposal to the federal cabinet for approval. The PBG was made up of representatives from the union and non-union retirees and union actives with input from management employees. The process worked in that the PBG represented various stakeholder interest groups and had access to the company's financial information and the pension plan funding. The members of the PBG were in a better position than the company (or OSFI) to consider the appropriate measures for Air Canada's financial recovery against adequate funding for a secure pension plan. The active and retired plan members have a critical interest in the company's viability; at the same time, neither group want to jeopardize their pension plan. In the end, the company and the PBG were able to tailor a funding proposal acceptable to all parties.

The CAW believes that legislation should allow the union (or other member representative where there is no bargaining agent) and a company in CCAA to develop an alternative to the 5-year funding rule for solvency deficiencies. The legislation should be such that there is some flexibility for the terms of the funding but with limits in place (e.g., the 5-year period could not be extended beyond 10 years; minimum contributions in each year). The financial viability of the company should be considered, and the union should have access to all the financial data for the restructuring plan. And the legislation should outline a process for approving the funding proposal which is truly democratic and takes the interests of plan members into consideration.

As we stated above, an extension on the 5-year funding rule should be done on a case-by-case basis and require the approval of the Superintendent and the union.

There are some additional provisions to consider if extending the solvency period for companies in CCAA. A Pension Benefits Guarantee Fund (discussed below) and pension member protections in bankruptcy are important. In the recent proposed changes to the Bankruptcy and Insolvency Act (BIA), there is no additional protection for pensions (other than secured creditor status for late payments owed prior to the date of bankruptcy). In the accompanying press release, Finance states that pension protections are "best handled under the PBSA." However, the CAW believes that there is an important roll for the BIA to protect pension entitlements for private sector employees.

The BIA should be amended to provide that in a bankruptcy, solvency payments owed to the pension plan form a deemed trust and are for the benefit of the plan members. Or, another approach, although less protective, is to recognized pension plan members as secured creditors who could make a claim on the solvency payments owed to the pension plan. The latter approach would be an improvement on the current system where plan members have a low priority for claims on company assets in a bankruptcy.

Alternatives to Relaxing Funding Requirements

The Government of Canada is seeking views on whether there are alternatives to address funding issues other than relaxing funding requirements. For example, would special accounts for pension plans be feasible?

As the Consultation Paper describes "special accounts" the purpose is to ensure that in a wind up, the employer would only be required to pay the benefit obligations and any surplus would be returned to the employer. The Consultation Paper proposes a "notional account" as a means for hiving off the surplus, but the concept is not clear to us. At any rate, our position on the treatment of surplus in a partial wind up is also applicable here. The plan members contribute to the accumulation of any surplus and in a wind up they should share in the refund of surplus.

Disclosure of Funding Information

The Government of Canada is seeking views on whether there should be greater disclosure provided to plan members regarding a plan sponsor's financial condition, funding decisions and contribution holidays and how this may be done.

The Office of the Superintendent of Financial Institutions has stepped back from their role in overseeing the administration of pension plans. OSFI has worked with other organizations to develop pension governance guidelines, but the guidelines are voluntary and at the discretion of the plan administrator. While OSFI's focus on risk assessment and intervention is important, the CAW believes that the regulator should be more active in overseeing the governance of pension plans.

In the C.D.Howe (2004) report, Keith Ambachtsheer, notes that the poor governance practices of many pension plan administrators could become a serious problem. In particular, he notes the lack of cohesion among the various players - the Board of Directors, the actuaries, the fund investors, and human resources.

The CAW sees several ways to improve the disclosure of pension plan information, and such steps could improve pension plan governance:

  • First and foremost, pension information must be disclosed to the union executive representing plan members as well as plan members;
  • Implement Superintendent Nicholas Le Pan's (2004) recommendation to the Canadian Institute of Actuaries that actuaries conduct a random peer review on actuarial valuations; and
  • Require plan sponsors who take a contribution holiday to complete annual valuations rather than every three years, as is the current requirement.[3]

The CAW is not clear on what corporate financial information Finance would have the company disclose. The unions have access to the annual reports and quarterly filings of public companies. In general, if the company is in financial difficulty, they will approach the union to renegotiate the collective agreement and are usually forthcoming on their financial situation.

During the discussions with Air Canada on the extended solvency funding rules, it was imperative that the unions had access to the financial details of the restructuring plan and the pension data. Because we had the information, we were able to substantiate Air Canada's need for lower pension payments in the early years of the recovery, and we were able to weigh the security of the pension benefits under various scenarios. Certainly, in situations where the company and the union are negotiating flexible solvency funding, access to corporate finances and pension data are critical.

C. Void Amendments

The CAW does not support Finance's proposal to prohibit benefit improvements when plan is funded at less than 85 percent. The intent is good: it is unfair for employees to give up immediate wage gains for pension benefit improvements when those pension benefit gains could be lost in a plan termination. However, there are reasons to oppose the proposal:

  • The plan sponsor could insist on conservative assumptions for actuarial valuations prior to collective bargaining. With a funding status below 85 percent, the unions would not be able to negotiate benefit improvements.
  • Because most collective agreements have a 3-year term or less, the union is unable to take advantage of a subsequent improvement in the funded status of a pension plan.

While 85 percent funded status is worrisome to plan members, one must also consider the economic viability of the employer to fund a shortfall in a wind up. Nicholas LePan, Superintendent of Financial Institutions, made this point in a speech to the National Press Club in 2003:

Plans are allowed to run at a deficit for good reason. Not all deficits are cause for concern. What matters is the ability to fund the deficit. (p. 2)

The Dominion Bond Rating Service (DBRS, 2004) reviewed 296 defined benefit plans in the United States and Canada. Their report was entitled: "Issues with Pensions: On the road to recovery." Like Mr. LePan, the authors view the plan sponsor's ability to pay pension shortfalls as a key issue. They note that in the mining and forestry sectors, there are many plans funded at the 70 to 80 percent level. However, in their view, the absolute value of the pension shortfall is minimal in relation to the corporation's assets and revenues.

The CAW opposes the void amendment. The void amendment restricts the flexibility of employers and unions to bargain agreements in the interests of plan members

D. Full Funding on Plan Termination

The Government of Canada is seeking views on full funding on plan termination, and in particular how it should be applied to financially vulnerable sponsors.

The CAW believes that the federal government should follow the legislation in BC, Manitoba, Quebec and Ontario which requires full funding of pension shortfalls upon wind up. There is no justification for the current situation in federal jurisdictions whereby an employer can voluntarily wind up the pension plan, continue in operation, and provide the employees with less than their full pension entitlement.

Finance raises the concern that the plan sponsor may not be able to secure investments for the corporation if pension funding is required on wind up. The concern does not seem valid. Under the present terms of the BIA, it is extremely difficult to collect the funds owed to a pension plan even in jurisdictions where the pension legislation clearly requires the sponsor to fund shortfalls in a wind up.

The CAW proposed (see above) to amend the BIA such that outstanding pension payments form a deemed trust. Our proposal would make Finance's concerns real. However, in our view, the greater concern is that plan sponsors will allow a shortfall to accrue in the pension plan if they do not have to fund it in a wind up. And that seriously hurts plan beneficiaries.

The CAW strongly supports an amendment to the Act to require full funding on wind up.

E. Pension Benefit Guarantee Fund

The Government of Canada is seeking views on the viability of a federal pension guarantee fund including any comments on its possible design, operation, and powers.

The CAW supports the establishment of a Pension Benefit Guarantee Fund (PBGF). The Consultation Paper raises some valid considerations, but we believe that the challenges can be met.

The relatively small number of pension funds under federal jurisdiction poses a challenge. However, Finance could look to the current proposals for a national securities commission and consider a national PBGF. A national fund would have many advantages and could reduce premiums with the large economies of scale and a sharing of risk. There are numerous models to examine in European countries, Japan, the US, and Ontario.

Plan sponsors might be tempted to reduce plan funding if there is a PBGF. However, the premiums should be structured such that there would be a cost to employers who allow funding status to deteriorate. Furthermore, funding shortfalls would be a warning signal for the regulator to review the governance and funding of the pension plan.

Some opponents to PBGF have said that it is unfair for responsible plan sponsors to pay premiums which will be to the benefit of less responsible plan sponsors. In reality, today's "responsible" plan sponsors could find themselves in financial difficulties in the years ahead. The PBGF provides insurance for current and future situations.

The CAW believes that a PBGF is called for under the current solvency funding rules. Any legislative amendments to relax the solvency funding would make the PBGF even more critical. The Consultation Paper is, in our view, heavily weighted toward funding relief for plan sponsors. The PBGF is the only substantive counter proposal to improve the benefit security of plan members.

Conclusion

We thank the Finance Department for the opportunity to participate in the discussions on funding defined benefit pension plans. Although we would have liked to see a much broader discussion on retirement income for Canadians, we know that the topic of funding defined benefit plans is very important. We ask that the Department of Finance take a very careful and balanced approach to considering the interests of plan sponsors and plan members. The federal consultations will be important in shaping the discussions on defined benefit pension plans.


References

C.D. Howe Institute Backgrounder. (February 2004). Prepared by Ambachtsheer, K. A. Cleaning up the Pension Mess: Why it will take more than Money.

CAW-Canada Factum to Court of Appeal between Butler Brothers Supplies Ltd. And BC Superintendent of Pensions Financial Institutions Commission, CAW-Canada. File No. 32230.

Certified General Accountants of Canada. (2004, June 9). Canada Study Highlights $160 Billion Shortfall in Canadian Defined Benefit Pension Plans. www.cga-canada.org.

Certified General Accountants of Canada (2004). Addressing the Pensions Dilemma in Canada. www.cga-canada.org.

Dominion Bond Rating Service. (July 2004). Issues with Pensions. On the road to recovery. Prepared by W. Schroeder and F. Sorbara.

Le Pan, N. (2003, May 21). Canada's Pension Plans - Current Problems, Future Solutions. Notes for Speech on Pension Regulations to the National Press Club of Canada. Ottawa, Ontario.

Le Pan, N. (2004, November 18). Remarks to the General Meeting Canadian Institute of Actuaries. Queen Elizabeth Hotel, Montreal, Quebec.

Mercer Human Resources Consulting. (2003, November 20). Should the Pension "Deal" be Revisited? Marsh and McLennan Companies.

Statistics Canada. (January 2003). Pension Plans in Canada. Ottawa: Ministry of Industry. Catalogue Number 13F0026MIE.

Statistics Canada. (December 2001). The Assets and Debts of Canadians: Focus on private pension savings. Ottawa: Ministry of Industry. Catalogue Number 13-596-XIE.

Towers Perrin HR Services. (May 2004). Renovate to Rejuvenate: Canadians need a 21st century pension plan. White Paper.

Watson Wyatt. (November 2004). Special Memorandum. Canadian Pension Plans after the Monsanto Decisions: A Discussion Paper.


Appendix

Summary of CAW-Canada Submission to Finance

Issue in Finance Consultation Paper CAW-Canada's Response

Surplus

�

Are there disincentives preventing plan sponsors from adequately funding their plans and building up a funding cushion, such as the 10% excess surplus limit or the

"asymmetrical risk" for plan sponsors

Support increase in current surplus limit

Do not agree that plan sponsors hold unfair risk in funding pension plans

Should there be improvements to dispute settlement process for surplus distribution

Union should be recognized as the party representing active members on the initial consent for surplus distribution

Should there be partial plan terminations under the PBSA and if so, should there be a requirement to distribute surplus at the time of partial wind up

Support maintenance of partial wind ups and support distribution of surplus in a partial wind up

Funding

�

Should there be options for flexible solvency funding

Funding relief is an important issue requiring broad public discussion on conditions, options, and approval process.

Finance should recognize the temporary nature of current pension shortfalls when developing options for funding relief.

Support some forms of funding relief on a case-by-case basis if legislation sets safeguards and relief requires agreement of the union and approval of Superintendent of Financial Institutions.

Letters of credit

Consider if sufficient safeguards in place

Extend the 5-year solvency funding period

Apply on a case-by-case basis with the approval of the Superintendent and the agreement of the union

Special accounts

Concept requires further explanation.

Other suggestions

Amend BIA to ensure that solvency payments owed to the pension plan form a deemed trust and are for the benefit of plan members.

Should there be greater disclosure of plan sponsor's financial condition, funding decisions, and contribution holidays. How could it be done?

Union executive should receive information. Plan sponsors taking contribution holidays should file annual valuations.

Void Amendments

Should legislation prohibit benefit improvements when the plan is funded at less than 85 percent.

Oppose void amendment as it restricts flexibility of unions and employers to bargain agreements.

Full Funding on Plan Termination

Should there be full funding on plan termination and how should it be applied to financially vulnerable sponsors.

Support an amendment to require full funding on plan wind up

Pension Benefit Guarantee Fund

Is it viable to have a federal pension benefit guarantee fund.

Support a national PBGF with participation from all jurisdictions as a viable option. A PBGF important to counter any weakening of solvency funding rules.


1 Statistics Canada reported that 33 percent of Canadians would not be able to replace 66 percent of pre-retirement income and 44 percent of Canadians would not be able to meet the 80 percent replacement target. The standard target for retirement income is 70 to 80 percent of pre-retirement earnings, although low income earners may need to replace 100 percent of income. [return]

2 Several actuarial and accounting firms have published reports on the funded status of pension plans and recommended various forms of conversion to defined contribution plans and/or reducing employee benefits. See, for example, Certified General Accountants of Canada (2004), Mercer Human Resources Consulting (2004), Towers Perrin (2004). [return]

3 Such a measure would have been very helpful with Air Canada, where the existing valuation showed a surplus which did not reflect the actual status of the plan. The company continued taking contribution holidays even though the solvency ratio had dropped to less than 1.[return]