by Bob Farmer, President, Canadian Federation of Pensioners
Imagine the following scenario. You are sent a letter from your employer of ten years ago. In the letter, your employer explains that it has reconsidered the salary you were paid ten years ago, and has decided in retrospect that it was too much. To be clear, there is no claim of payroll error that has just come to light. Rather, the employer has changed its mind about your salary and is demanding a rebate from you.
A likely scenario? Most would think it is not even remotely plausible. It seems nonsensical to think that there is any chance that the salary you have already earned would be clawed back.
The facts are, though, that the probability of this sort of clawback is not zero, and it is growing.
The clawback of interest to pensioners does not relate to that portion of past salary that has already been received. It relates to the other portion of salary; the portion that was deferred until the pensioner’s retirement years; the amount that the employer committed to paying when the pensioner’s working years were over. That portion is better known as a defined benefit pension; and the clawback is in the form of a reduction in pension payments.
There are many factors working together which are increasing the likelihood of pension reductions.
First, it has long been the case that the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act provide very little security for the unfunded portion of a pension plan. Those Acts do not even put into effect the protections that pension legislation ostensibly provides. If an employer is bankrupt, the most likely outcome is that pensions will be reduced in proportion to the pension deficit. That is a lesson that has been hard learned by pensioners of Nortel and other companies. Insolvency legislation needs to be reformed so that the interests of pensioners – the most vulnerable of all creditors – are not subordinated to the interests of most other creditors.
Second, DB plan underfunding is commonplace, and has been for years. In Ontario, for example, on average, plans have a 17% deficit; 63% of plans have a shortfall of at least 15%. Ontario has not taken its opportunities to introduce even the most obvious of funding reforms, such as requiring employers to contribute according to annual plan valuations.
Third, funding regulations that already permit persistent plan underfunding have been relaxed from time to time. And this can only worsen the situation for pensioners. On a number of occasions, for example, Ontario has extended broad funding relief to employers, and its 2016 budget promises yet more “temporary solvency funding relief”. In Québec, the need to fund a DB plan to its solvency liability has been lifted. Ontario will be consulting this year on whether solvency valuations should be used for the funding of DB pension plans. Since it is the solvency liability that measures what is needed in a plan when it is wound-up, not funding to the solvency standard can make a plan appear to be fully-funded according to regulations, even though the plan would still fall well short of meeting its pension obligations should it be wound-up. And that means pensions would be reduced should the employer become insolvent.
Fourth, pension rules can be changed to rewrite the pension commitment. The so-called “shared risk” model in New Brunswick and Bill 57 in Québec contemplate changes to pension terms, and, in particular, indexation, in respect of work years already completed. The target benefit model currently being considered by Finance Canada for federally-regulated plans holds open the potential that defined benefits already accrued can be converted to a target benefit plan, and subsequently be reduced as a result of poor plan performance. It was only after considerable effort by pensioner and employee organizations that the responsible minister in the previous federal government committed to disallow involuntary conversion of accrued benefits earned by the individual. It is not clear how the current government intends to proceed on this issue.
We are told that retirement income security is a priority of Governments in Canada, and so it should be. But their legislative reforms, and, in some cases, the lack of them, is undermining the security of the retirement income for the millions of Canadians who thought they could rely on the commitments that have been made to them. Over the last several years, the Canadian Federation of Pensioners and its member organizations have made many recommendations to address the legislative regulatory shortcomings. The one overarching theme of the recommendations – from insolvency legislation to funding rules to governance practices – is that government rules should honour the commitments that have been made to DB pensioners. Pensioners have made a deal with their former employers, and have already lived up to their side of the bargain. They are expecting that the Government rules will hold those employers to their side of the bargain.
Bob Farmer is President of the Canadian Federation of Pensioners (CFP). CFP is an association of workplace pensioner organizations, which collectively represent the interests of 250,000 members of defined benefit pension plans across Canada. For many years, CFP and its member organizations have advocated with federal and provincial governments for greater security of the defined benefit pensions that employers have committed to provide. Bob is a former president of the Bell Pensioners’ Group, one of the member organizations of CFP.