Thousands of pensioners have seen their retirement incomes shredded and millions more are seeing their benefits squeezed or threatened. These setbacks are fuelling prolonged and confusing legal battles over pension surpluses and deficits.
What can workers do to check the health of their pension plans before it is too late? What rights do employees have to monitor pension plan performance? Are employers entitled to pension surpluses? Why are courts allowing companies in bankruptcy protection to delay fixing pensions deficits? What are employee rights when companies move to cancel or freeze defined benefit pension plans? Do pension class actions make sense?
Simon Archer is a member of the Koskie Minsky Pension and Benefits Practice Group. He was a Senior Research Associate with the Ontario Expert Commission on Pensions, and he represents workers and unions in a number of lawsuits relating to pensions.
He took reader questions in an online discussion.
Mr. Archer is also a Research Fellow of the Centre for Comparative Research in Law and Political Economyat York University. He has published and spoken in the area of pensions and benefits, financial institutions, capital markets and corporate governance.
Questions and answers from the discussion
Claire Neary: Simon, you were a senior research associate with the Ontario expert commission on pensions. Can you tell us a little bit about your findings? ( http://www.pensionreview.on.ca/english/report/)
Simon Archer: The work we did at the Commission was to investigate and describe the current state of the occupational pension system in Ontario, and to investigate factors affecting the system, and identify options for reform. I think one of the most striking findings was the long-term decline in the provision of occupational pensions. We estimated that about 34 or 35% of the paid labour force in Ontario participated in an occupational pension plan, down from about 40% or so 25 years ago. To put that in context, in 1961, the Committee on Portable Pensions was established to address problems in the same pension system, and they thought that 40% coverage was a serious problem, even then.
Steve: How can I inform myself that a pension is adequately funded? Is the company required to publicly disclose financials on the financial health of the pension to some regulatory agency?
Simon Archer: A good question Steve. Sponsors and administrators of pension plans -- employers in many cases -- are required to file reports with the regulator, the Financial Services Commission of Ontario. Members of pension plans -- employees and retirees -- may review those documents at FSCO. Those documents include several reports, some of which are funding reports, the most important of which are actuarial valuations. Companies are also required to disclose pension liabilities on their financial statements, and public companies (listed on an exchange) must disclose financial information. But the problem for employees has always been access to those documents, particularly historical documents, in a cheap, easy way. For that reason, unions and other employee groups have advocated having key financial information sent directly to them, or being made available on a website, or some other more cost-effective electronic dissemination.
Barry from Nova Scotia: Good Morning, My employer froze my Defined Benefit Pension and increased my normal retirement age. As my Defined Benefit Pension was no longer going to grow and was actually going to decrease due to inflation, I opted to leave the employment of the company as this was the only way I could get my commuted value and hopefully get my pension back on track. However, the pension plan was only 67% funded, and when I received my commuted value I only received 67% of the value and would receive the rest of the monies owed to me within the next 5 years. As I am no longer a member of the pension plan, is this Legal?
Simon Archer: Barry, it is difficult to give legal advice through a forum like this. What you describe is not unusual in my experience, as employers have sought to freeze or eliminate defined benefit plans. When an employee elects to transfer his pension benefits out of a plan (a lump-sum transfer) and a plan is under-funded, it is usually permissible to pay some of that lump sum up front, and the remaining amount over a period not exceeding five years. This is intended to ensure all members are treated equally when a plan is under threat. It is a very common question you have, and the Ontario government recently amended the Ontario legislation to require that the regulator -- the Superintendent -- gives permission to lump-sum transfers.
Carl: If companies make additional contributions to make up for pension shortfalls and then interest rates go up, is there not a possibility that the shortfall will turn into a surplus? and then under current rules the company would not be able to withdraw or reverse any of their contributions?
Simon Archer: The short answer to Carl's question is, "it depends". If companies (or employees) pay additional contributions to eliminate a deficit in the plan, and then fortunes reverse, there may be a surplus in the plan. However, what happens to that surplus is different in each particular case. If a plan permits employers (or employees) to use surplus for "contribution holidays" or to withdraw some of that surplus, then it may do so, as long as it complies with the legislation. The real problem you are asking about is the situation in which only employees are legally entitled to surplus, or more commonly, the plan is ambiguous and there is no clear entitlement to surplus. In that situation, surplus may be "trapped" in the plan. One solution to this is, in part, to raise the limits on surplus that must be kept in a plan against adverse experience. Roughly speaking, surplus levels are capped at 10% (e.g., the plan is funded at 110% of its liabilities). In the Netherlands, for example, that limit is something like 175%. Manitoba recently proposed a new regulation that would require at least 105% before any use of surplus could be made.
Claire Neary: What can be done to shore up pensioners' rights in bankruptcy court?
Simon Archer: A vexed question. The problem is this. We require pension plans to be "pre funded" so that, if anything happens to the employer, the pension is safe. If the rules that apply to funding permit long periods of under-funding, or we have a year like last year, plans get under-funded and now and then, the employer becomes insolvent before they can replenish the pension fund. In a bankruptcy proceeding, the claim the pension plan has on the company is an unsecured claim -- in respect of pension plan deficits at least. The most direct way to address this is to have pension plan deficits be given a higher priority in the scheme of the Bankruptcy and Insolvency Act. However, as many have noted, that would displace other creditors and potentially raise the cost of capital. Bankruptcy is a difficult place to make pension policy, but I suppose one of the arguments that supports a higher priority for pension plan deficits is that pensioners cannot absorb the risk or cost of being an unsecured creditor. Other creditors, such as business creditors, have at least some capacity to write-off bad debts. Pensioners have virtually no way to make up their losses.
Linda McNeil: The recent Supreme Court ruling on the "Kerry Case" regarding the use of surplus assets to pay Employer contribution obligations and the payment of administrative expenses from the pension fund, was certainly good new for Plan sponsors. What has been the reaction to the ruling by plan members? Do you think this ruling will have an impact on the communication programs of a plan sponsor by way of more detailed information being provided to plan members or more requests being made by plan members for such information.
Simon Archer: Linda, another vexed question. I think it is fair to say that members and retirees were disappointed by the Kerry decision. There is a sense in which the court was retreating from some of its previous decisions in favour of employees or retirees. That debate will continue, no doubt, but we are seeing fewer and fewer cases brought over surplus rights, in part because there is less surplus around. I hope the case has the effect on communications that you suggest. As we were discussing tangentially earlier, adequate communication about the pension plan and its financial state is crucial information for members and retirees in their planning, and all improvements to it are welcome by members. I'm not convinced the Supremes have had that effect, though, and the most direct way to achieve it is to mandate it in regulation, as Manitoba has recently done in proposed regulations.
Steve Lambert: Hello Simon, I am one of dedicated group of CanWest retirees who when our CHTV station was sold were informed that our pension plan was to be wound down, with no questions asked.. We have come to discover that our plan may have a 9 million dollar shortfall that the company is binded by contract language to fill , they are planning to walk away from this obligation...What steps can we and our government regulators take to counter this atrocity?
Simon Archer: Well, the first step is start asking questions. In most jurisdictions except the federal jurisdiction, employers are required to fully fund a pension plan when they terminate it. Canada -- the federal jurisdiction -- stands out as the main exception, and it is a real problem. It may be possible to force the company to fully fund the plan as a matter of contract law or the terms of the plan itself, or at least to negotiate a solution. Retirees in other similar circumstances -- I'm thinking of Bell retirees -- have grouped together and negotiated with employers to get the right result. So I would also consider getting organized with other retirees and exploring some of your options.
Dominique: My concern is with the apparent "discriminatory aspect" of pensions in Canada, everybody who pays into the CPP long enough will get "some money" back, but after that you're on your own, and if you are lucky enough to work for a public service of sorts with its most generous of plans, the pickings are rather slim, most companies don't even offer RRSP's any more.
Simon Archer: Dominique, you've really just summarized the biggest challenge facing our retirement system in Canada. I'm not sure what you mean by discrimination, but it is a fact that two-thirds of working Canadians don't have an occupational pension plan, and in the private sector, 75% of workers don't have an employer pension plan. Back in 1961, the recommendation was to make employer pension plans mandatory for all employers with more than 15 employees! But instead, they created the CPP, and that is probably the right place to start with reforms today that are available to all working Canadians. If we expanded CPP, it would be available to anyone who worked, and would provide greater benefits in retirement. Of course, we'd have to contribute more to CPP as well.
Dennis: What needs to change in the provincial and federal legislation to make it attractive for companies with defined benefit plans to fully fund their promises (not just legal obligations) to plan members?
Simon Archer: Dennis, right now employers are required to fully fund their pension promises, and I should be clear, many do, but the question is, over how long a period of time may you permit under-funding, and under what assumptions about return on assets, interest rates, and so-forth. The primary incentive to provide and fund a pension plan is the tax relief. This permits employers to provide a wage-like benefit to employees on a tax-favourable basis. It is true that even with this tax advantage, employers have been slowly closing out defined benefit plans and converting them to defined contribution plans or group RRSPs. The other often-quoted answer to your question is to change the regulation of surplus to permit employers to keep all surplus where plan documents are ambiguous (as we were discussing above). The argument is that this will incent employers to fully-fund pension plans. I'm not convinced that is true -- employers don't fully fund plans even in plans and jurisdictions where they unilaterally own surplus -- but it is offered as one way to encourage full funding of DB plans.
Claire Neary: Simon, what do you think of proposals for new models of pension plans, like target benefit plans that can see benefits reduced if the pension plan is underfunded? It seems like these models could end up hurting plan members if their benefits are cut, but perhaps this flexibility would help "save" some existing pension plans that companies are considering shutting down. What's your view?
Simon Archer: In principle I think target benefit plans are a good idea, or at least, a viable option, where there is meaningful employee and retiree "voice" in decision-making about the plan. We see this in multi-employer plans (which are really target benefit plans) and jointly-sponsored plans. Those plans tend only to reduce benefits as a very last resort, and where there is otherwise some unfairness or threat to the plan as a whole. The "voice" is key in those decisions. I think it would be a difficult and possibly dangerous type of plan to introduce without that "voice" trade-off. The purpose behind a defined benefit plan is the certainty around the adequacy of income in retirement, and one oft he mistakes we have made in the past is not recognizing or communicating the risks associated with even the most secure of promises -- the defined benefit.
Bob from PEI: Does the federal government have any legal obligation to pay pensions to staff who have retired?
Simon Archer: Bob: I am sorry for the lawyers' weasel answer, but the answer is "maybe". If you worked for the federal government and there was a pension plan, then you probably have rights to that pension. If you mean, is there an obligation on the federal government to pay pensions of other employers, then the answer is almost certainly no.
Tom: What options do you have as an employee when a company files for bankruptcy and the pension fund is not fully funded?
Simon Archer: As an employee in a bankruptcy, your options are limited. If you are unionized, your union will almost certainly be able to participate in the bankruptcy proceedings and do its best to ensure the pension plans deficits are paid. If you are not, then you can seek information about the plan from the employer or the trustee or receiver. Sometimes employees form "ad hoc" groups and get legal advice about the best way to participate in bankruptcy proceedings -- something we see quite often. If it is a restructuring and not a full bankruptcy and liquidation, then it is even possible to have the costs of representation paid for from the restructuring itself, although this is never a certainty. In a bankruptcy, the pension plan will have a claim on the company, but as we discussed above, it is largely an unsecured claim -- that means, if there are enough proceeds from the liquidation to satisfy the secured creditors (think, banks and bondholders) then the pension plan may get some cents on the dollar.
Charles Howard: I work for a large mining company in BC. I was a member of a DB pension plan while in the production ranks. The company asked me to join its management group and among other perks the DC pension numbers looked attractive. I transferred in 1999. My commuted value from DB bought me into the management DC plan and since then I have lost probably 50% of the value. I am 56 years old and the pension horizon looms. I am in financial trouble through no fault of my own other than wanting to expand my career opportunity. Some type of Hybrid plan needs to be developed and soon!
Simon Archer: Charles, yours is a story we see often, and it just underlines the value of the defined benefit pension, and the real risks associated with a defined contribution or group RRSP. A hybrid plan would protect you from some of the downside - but not all.
J: I was a BCE employee for a number of years and transferred to Nortel/BNR Because Nortel/BNR was part of the BCE empire I had my pension bridged. I was at Nortel/BNR for 4 years before being laid off. During the pension bridging exercise and later when I was laid off and had to decide to leave the money in the pension plan or take a lump sum, I asked many questions. I wanted to know how they determined what my pension would be. I also asked for information on the solvency of the plan/risks to me. I didn't get many satisfactory answers. It was always "don't worry, everything is good, the plan is solvent. There will be money there to pay your pension when you retire." Also, when I was laid off I wanted to know how they calculated my deferred pension amount. Someone called me up on the phone and "explained" it but they would not give me the information in writing. I didn't understand their rationale. When I did the calculations myself , I figured I deserved a larger pension. I was told by others, that if I wanted to know if I was getting the proper amount, I would need to hire an actuary to figure it out, costing me thousands of dollars. (I'm not sure how an actuary would figure this out because they wouldn't have access to the necessary information from the employer to do this properly, would they?) When I was an employee pension information didn't flow freely. I suspect few people in HR departments really know much about pensions so deflect any probing questions. No one explained the risks. Hind sight is 20/20. If I had known early in my working career what I know now about defined pension plans and the risks involved, I would have saved a lot more money towards retirement. Too late now… My question is, are there no rules governing what information an employee is entitled to regarding their pensions? (As a defined pension employee, all we ever got was a pension statement once a year).
Simon Archer: Dear J: the short answer is, yes, there are rules, but as you experienced, they are often inadequate. These rules are found, in your case, in the federal legislation, because BCE is a federally-regulated employer, and potentially Ontario legislation (where Nortel is registered), depending on exactly which problem we are dealing with. Already you can tell it is a patchwork of regulation that is not easy to understand! A pension plan sponsor or administrator is required to send you an annual statement with certain information about your accrued benefits and, in a defined benefit plan, that would indicate a pension amount at retirement (among other options, etc.). That statements gives you the basics, but would probably not be enough to base key decisions on. At certain times in your life an employee and pension plan member, the employer is also required to send you other information, including termination options, options at retirement, or the effects of changes to the plan(s). It sounds like you tried to ask questions about your termination options but did not get too far. That is pretty common, and unfortunately, we hear about problems years or even decades after. That is one reason why we -- and members and retirees -- insist on extensive disclosure from plans when we cam and why we advocate making plan documents available by electronic means. I suppose my best advice to those in similar circumstances is ask a lot of questions, take a lot of notes, and seek advice if you have doubts. Problems can usually be fixed easily right away, but years later, they are much harder to address. Good luck.