The State of Defined Pension Plans in Canada: An Update 

Backgrounder

• The November 2005 report builds on CGA-Canada’s June 2004 publication with the goal of further advancing public understanding.
• It serves to:
  • outline the predicted risks and the proposed actions for transformation;
  • examine the nature of funding deficits;
  • draw a comparison between 2003 and 2004 results; and
  • provide the public with an update to the state of DB pension plans in Canada.

Facts from November 2005 Report:

Funding

• The estimated number of deficit DB plans has not improved since December 2003, and the percentage of pension plans in deficit is higher than that of last year (96% in 2004 versus 95% in 2003).
• It is estimated that the additional funding required to fully fund those deficit plans has grown from $160 billion at the end of 2003 to $190 billion at the end of 2004.

The Nature of the Pension Controversy in Canada

• Pension under funding is not the only issue. Pension plan administration is unduly complex and is plagued by ‘pension system’ shortcomings. These include the ownership of surpluses, issues of relevancy with respect pension legislation, as well as concerns related to contentious accounting and actuarial practices.
• There is no indication as yet that legislators are considering alternate methods for distributing pension surpluses in the case of partial wind-ups.
• There are a large number of plans that exist outside the regulatory framework. And while member protections are afforded in the long term by regulation, experience tells us that in that in economic downturn, all bets are off.
• Another issue is demographics, including traditional and perhaps outdated retiree expectations. Canada’s population is aging, and the dependency ratio (i.e. in-actives over 55 relative to active labour force participants 15 years and up) will double between 2000 and 2030.
• Accounting rules present another problem – plans with large deficits can legitimately defer recognition of obligations in such a way that they do not appear on corporate balance sheets.
• Employers have continued the trend of restructuring and/or replacing defined pension plans with less financially onerous retirement arrangements. For example, employed Canadians in workplace pension plans dropped by 5% between 1992 and 2002.
• The very imbalance in DB pension plan participation which is now mounting between the public and private sectors will bring about a whole new multitude of human capital issues for Canada.

Canadian Pension Under Funding Examples

• Stelco’s pension liabilities alone (which are in excess of $1 billion) far exceed the approximately $300 million in funds that are available through Ontario’s Pension Guarantee Fund.

St. Anne Nackawic Pulp & Paper Co. Ltd.

• The company’s two plans were under funded by about $30 million. By December 2004, it had been determined that workers under the age of 55 years would receive no pension benefits.

General

• Defined benefit pension plans have lost their appeal. We can not reasonably expect a resurgence of those plans but we can moderate the pace of decline of enduring plans while providing a framework which better enables the creation of new or redesigned plans.
• Just like any form of contractual undertaking, an employer should not be permitted to abdicate itself from its promised pension obligations. Failing on pension obligations is no more acceptable than not following through on payroll.
• We need to acknowledge that the pension system is gravely imperfect. Changes to pension plans should embody meaningful compromises which promote greater plan certainty, credibility, viability and longevity.
• The solvency and long-term sustainability of Canada’s pension system will undoubtedly depend on how well stakeholders understand, anticipate and act “systemically” in addressing those challenges.

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