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public policy & economics
Company Pensions Should be Viewed as Partnerships
For some Canadians, the recession has meant losing a good job late in their working lives with grim hopes of finding a new one. The cruelest blow though, may be finding that the pension they thought would provide a comfortable retirement for them is underfunded and unable to meet their expectations.
“We were always told for years the pensions were stable; they were monitored by the government. No one (in the mill) ever dreamed our pension plan was as underfunded as it was,” Nelson Ellsworth told The Toronto Star in December last year. Ellsworth was a
Research by CGA-Canada and other organizations has illuminated the funding shortfall of many defined benefit pension plans, and the recession has demonstrated why the issue matters. But the situation might have been avoided altogether if private pension plans were funded differently.
Earlier this year, CGA-Canada proposed an alternative funding model for private pension plans that is based on the idea of a partnership agreement between employers and employees where both parties contribute to the welfare of the plan beneficiaries. The model is founded on the view that pension benefits should be considered as deferred compensation which is contractually and legitimately owed to workers, and as such should be managed and preserved for that purpose – a conclusion reached in
One of the key features of this model is the recognition that companies or divisions tend to have finite lives. For that reason, the eventual windup of the plan is anticipated and planned for in its configuration. Surpluses would be shared equally by the members and the sponsor because the aggregate amount of surplus would result from contributions by both parties. “Ownership” of surpluses has proved to be one of the most contentious aspects of defined benefit pension plans.
There has been little dispute over pension plan deficits, which are deemed to be the responsibility of the employer and would continue to be under the
In the real world, the concept of two partners continually providing equal funding toward a pension plan may not always be practical or realistic. Economic circumstances may require that one party take periodic contribution “vacations” or make a withdrawal from a pension plan surplus. Under the CGA funding model, the time value of money would be applied to determine how surpluses should be apportioned in these situations.
A further benefit of the CGA funding model is that it would provide the true cost of funding the defined benefit pension plan, making comparisons to the cost of a defined contribution plan more reliable.
CGA-Canada proposed the funding model as part of its response to a consultation paper issued by the Department of Finance called Strengthening the Legislative and Regulatory Framework for Private Pension Plans Subject to the Pension Benefits Standards Act, 1985. The consultations are expected to result in changes to legislation to be introduced by the end of the year. The CGA response is available on the Department of Finance website. An article (
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