Flaherty tackles pension shortfall

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Ottawa is beefing up protection for employee pensions in federally regulated industries, but stopping short of helping millions of Canadians who have no retirement savings plan or have seen workplace schemes shredded by corporate bankruptcy.

The Harper government unveiled the measures ahead of schedule Tuesday to demonstrate it has been working to address rising concerns about a retirement savings crisis in Canada.

The reforms are largely focused on federally regulated pension funds - which comprise 12 per cent of private-sector plans by assets - and do not address the broader question of how to persuade Canadians to save more for retirement.

Ottawa and the provinces will consider that topic at a December pension summit in Whitehorse.

The reforms would apply to industries such as telecommunications, railways and airlines, and companies such as BCE Inc., Air Canada and Canadian National Railway Co. But the measures are expected to put pressure on provinces to follow Ottawa's lead, at a time when total deficits in Canadian private-sector plans are estimated at $50-billion.

In yesterday's announcement, Finance Minister Jim Flaherty said Ottawa will prevent firms from taking "contribution holidays" and skipping payments to pension plans unless their workplace funds are running a surplus of at least 5 per cent.

Under current rules, firms can avoid contributions as long as the plan has no deficit, a practice Finance said yesterday is a "contributing factor" in plan shortfalls.

At the same time, Mr. Flaherty has rebuffed requests by large federally regulated companies to be given 10 years to repay shortfalls in their plan funds.

He's keeping the limit at five years but has compromised, allowing firms to calculate shortfalls using an average of the past three years - a change expected to smooth out any hits from one bad year.

Christopher Brown, a Calgary lawyer who co-chaired a joint Alberta-B.C. expert panel that recommended a number of pension reforms, praised Ottawa for showing leadership. "They got out in front of the provinces, so it appears they're trying to set the agenda."

Brett Ledger, pension specialist with Osler Hoskin & Harcourt LLP, said "This is unbelievably comprehensive … It is a huge overhaul … There is something for everyone."

Other pension experts, however, said the reforms do little to encourage companies to keep traditional defined-benefit pension plans in place. They warn that Ottawa is not offering major concessions to address the critical funding problems facing some companies but is instead imposing significant new costs.

The opposition New Democrats said they will support the reform legislation, a pledge that ensures the minority Conservative government can pass it into law.

The Tories say they hope to get legislation and regulations in place by June, 2010.

One reform that won broad kudos is a legislated process to help extremely troubled companies facing big pension deficits work out this problem without collapsing. Mr. Flaherty said it's based on the system that Finance used earlier this year to help Air Canada restructure its pension problems.

Under this process, companies in critical financial condition will be given more time to repair pension deficits, provided their board makes a declaration that they cannot make necessary pension payments and the relief is approved by the Finance Minister.

"The one really practical proposal is the workout scheme that will provide all plan stakeholders with flexibility to help prop up pension plans in crisis situations," pension lawyer Mitch Frazer said.

Absent from the measures is any relief for pensioners whose companies have collapsed.

Mr. Flaherty hinted that Ottawa has not shut the door on this question, saying he will be discussing with provinces whether action needs to be taken to help pensioners sideswiped by bankrupt companies.

"Ninety per cent of the pension plans in the country are provincially regulated. So this isn't something we can act on without consulting the provinces and territories," the minister said.

Mr. Flaherty suggested it would be hard to grant pensioners a higher priority in bankruptcy proceedings. "This is not simple. When you are dealing with bankruptcy law you are dealing with priorities of creditors and this can affect the ability of companies to borrow and carry on their business."

The Conservatives say they announced these measures sooner than planned because they wanted to head off the impression that they were goaded to act by the opposition Liberals, who held a public forum on the deficit in retirement savings among Canadians. "We don't want to be looking like we're responding to [Liberal finance critic]John McCallum," one official said.

In a wider-ranging measure that will affect both federally and provincially regulated plans, the Tories are also proposing to encourage companies to run larger 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.