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Former employees and pensioners of Nortel Networks Corp. are joined by supporters during a demonstration on Parliament Hill in Ottawa. (CHRIS WATTIE/CHRIS WATTIE/REUTERS)
Former employees and pensioners of Nortel Networks Corp. are joined by supporters during a demonstration on Parliament Hill in Ottawa. (CHRIS WATTIE/CHRIS WATTIE/REUTERS)

Jim Flaherty unveils pension reform Add to ...

Under pressure to act on retirement security, the Harper government has moved up the timetable for some long-awaited reforms to federally regulated pension plans, but the measures don't include any relief for pensioners whose company has collapsed.

Finance Minister Jim Flaherty on Tuesday unveiled his proposed changes, which include rewriting tax laws to encourage both federally and provincially regulated companies to run bigger pension fund surpluses. The Conservatives are looking to change tax law so that companies are allowed to run surpluses of as much as 25 per cent instead of the current 10 per cent level. This cap exists to limit federal tax revenue lost on the tax-deferred pension contributions.

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However, much of the reforms only address the workplace pension plans of federally regulated industries - including telecommunication companies and airlines - that comprise about 12 per cent of overall private sector employee plans in Canada by assets.

Ottawa is also proposing to change the rules for federally regulated industries to require that they continue to contribute to workplace pension plans unless they are running a surplus of at least 5 per cent. Under current rules, federally regulated companies can take a "contribution holiday" as long as the plan has no deficit.

"The practice of taking contribution holidays was widespread in the past and has been a contributing factor towards the under-funding of pension plans during the past several years," the Finance Department said in a release.

The government also wants to restrict companies' ability to sweeten benefits if its workplace plan is less than 85 per cent funded, or if the improvements would cause funding to drop below that level.

Plus, it plans to require federally regulated companies that voluntarily wind up pension plans to pay out all the benefits they owe their workers, prohibiting plans from shutting down with large deficits.

Tuesday's announcement only deals with reforms to federally regulated pension plans and doesn't address the larger debate taking place about the retirement savings crisis. Ottawa still faces calls to introduce compulsory or voluntary schemes that would compel Canadians to save more for their retirement following revelations that many are ill equipped after life in the work force.

The Tories had originally planned to release these federal pension reforms by December, but Mr. Flaherty decided to release them Tuesday. In recent days, the opposition NDP and Liberals had begun to ramp up pressure for action on pensions.

"People want answers," one federal official said, by way of explanation.

Pension experts warned Tuesday that many of the new reforms will have virtually no impact. They say most pension funds do not have a surplus that could now be enlarged under the new rules, and they argue the wind-up changes merely close a loophole that has rarely been used.

"These two changes are fundamentally irrelevant," argued pension specialist Mitch Frazer, a lawyer at Toronto law firm Torys LLP.

Mr. Frazer said provincial pension rules already forbid financially healthy companies from voluntarily winding up a pension plan that is in a deficit position and walking away from the problem.

Federal laws have not had the same prohibition for the small minority of federally regulated plans, and the changes will fix the anomaly. But Mr. Frazer said he doesn't know of any healthy company that has taken advantage of the loophole in the past to abandon a plan with a deficit.

More critically, he said the reform will not address the far more common problem of under-funded plans being wound up in bankruptcy, leaving retirees facing sharply reduced pension payments.

"It doesn't have any meaningful impact on bankruptcies, which is where the problem is," he said.

Pension lawyer David Vincent of Ogilvy Renault LLP said unless the federal government also plans to change the law to allow companies to extract excessively large surpluses from their pension plans - a move that is almost impossible under current rules -firms will continue to avoid building up any surpluses in their pensions.

As a result, he said, few, if any companies will take advantage of a change allowing surplus assets in pension plans to grow from 110 per cent of liabilities to as high as 125 per cent.

"If the government really seriously wanted to create an incentive for companies to, in effect, over-fund their pension plans ... increasing the tax limits will not allow them to do that," Mr. Vincent said.

"Ever since the withdrawal of surplus became controversial, most companies have tried to carefully manage their funding of their plans."

The government since January has been consulting companies and other players in the pension industry on proposed changes.

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 under-funded by an estimated $50-billion.

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