The Harper government is looking at overhauling tax law to encourage bigger pension-fund surpluses, as part of a series of reforms to the country's crumbling pension regime to be introduced this fall.
Concerned over plan deficits, the government since January has been consulting companies and other players in the pension industry on proposed changes. A bill is expected to be introduced by December, said Ted Menzies, parliamentary secretary to Finance Minister Jim Flaherty and Ottawa's point man on pensions.
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 underfunded by an estimated $50-billion.
"These people were promised a pension ... They thought they had a pension," Mr. Menzies said. "If there's a way we can - within our jurisdiction - make that more assured for those people, then we'd better do it."
Ottawa has direct oversight of federally regulated industries, a group that makes up just 10 per cent of the asset value of all private plans in Canada, while the remaining plans are regulated at the provincial level. But by changing tax policy around pension fund surpluses, Ottawa would have a much broader and more far-reaching impact on how companies plan for their employees' retirement.
Even if it's enacted, such a change would not have an immediate impact because so many pension plans are so badly under-funded right now. The thinking is that Canada needs to encourage plan sponsors to amass bigger cushions as a way of guarding against future threats to their solvency.
The Income Tax Act forces employers to halt contributions to a pension plan as soon as a surplus in the fund equals 10 per cent of its liabilities. This cap exists to limit federal tax revenue lost on the tax-deferred pension contributions.
But Mr. Flaherty, who's been studying the issue for nine months, has faced frequent calls from actuaries and many in the industry to raise the threshold to 20 or 30 per cent - or even scrap it altogether.
"I will tell you that we heard from many of the actuaries and many of the legal advisers that if a surplus was allowed to be carried forward, we may not have been facing the problems we are today," Mr. Menzies said.
Ottawa is considering this measure, he said, because bigger pension surpluses would allow companies to "plan for a rainy day. It's a simple method to protect people," he said.
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.
At the same time, the government is also weighing whether it should grant plan sponsors more time to fund pension shortfalls. Earlier this year, Ottawa granted companies a temporary reprieve from the requirement that they fund shortfalls within five years.
Mr. Menzies suggested Ottawa may also act to boost reporting requirements for pension plans.
"We saw pension funds drop in the multi, multimillions of dollars a day. Because they reported a surplus in the previous reporting time, they didn't need to report for three years. Obviously [that's]a weakness," he said.
But Mr. Menzies 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."
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 plan with crushing solvency 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. Nov. 9 by-elections could slightly change this calculation.
Opposition parties are also sounding the alarm. The NDP last week proposed Canadians be forced to buy pension insurance.