Can private pensions be fixed?
Remember the bitter squabbles over pension surpluses that were waged between employers and pension plan participants a few years ago? At the heart of the battle that pitted retirees and current employees against employers (the plan sponsors) were the billions of dollars built up in some traditional “defined benefit” pension plans, thanks largely to soaring stock markets. (In defined benefit plans, members earn pension credits, usually related to their years of service, and are promised a specific benefit on retirement.)
Market conditions, or betrayal of trust?
That fight fizzled as a savage and relentless bear market gobbled up huge chunks of pension assets, including the disputed surpluses. Now, weak markets have cash-strapped companies claiming they have no choice but to slash pension benefits. Worse, companies in financial difficulty are accused of having used pension funds to shore up reserves and take “holidays” from their contribution obligations. Shocked and angry plan members, some of them retirees who’ve had their pensions slashed in half, see it as a massive betrayal of trust.
Could this financial cris have been avoided? Absolutely. Forward-looking regulators would have combined better pension standards with a more integrated approach to improving our pension system. Instead, vague standards, fuzzy accounting and bewildering inconsistencies have exposed plan members to alarming levels of risk and even made it difficult for companies to comply with rules in the first place.
Change is needed
Regulators must ensure pension rules are fair and equitable, that they protect the rights of plan participants, look out for the interests of the employers who sponsor these plans, and ensure taxpayers, who are all affected by any tax or other concessions to plan members, are also treated fairly. Recent experience shows they’ve fallen short on all fronts. Here are a few key areas where improvements could start.
Consistent standards. Currently, there are no less than 10 sets of standards — one for federally regulated industries and one for each of nine provinces (Prince Edward Island hasn’t passed legislation). Plan sponsors with workers across the country may be forced to deal with any or all of the 10 sets of rules.
Clear, realistic guidelines for financial reporting, including minimum funding requirements and investing. Currently, for instance, a company can hide a plan’s true health by using an expected rate of return to calculate whether a plan meets minimum funding requirements. Now, troubled pension plans are learning what happens if return expectations don’t pan out. Many of these same plans are now drastically underfunded; some companies even have pension obligations that outweigh their total market capitalizations!
Better inflation protections. Roughly 20 per cent of defined benefit plans contain indexing provisions that will protect members from rising prices through regular cost-of-living adjustments. That means the majority of these plans put members at risk for inflation.
Greater commitment to education. Today more than ever, financial planning and investing seminars, for example, would go a long way to helping members understand their rights and responsibilities, as well as how a plan fits into their future.
Sadly, it’s taken a crisis to shine the spotlight on a long-overdue overhaul of private pension standards. Even worse, the current predicament signals a larger problem — the risks inherent in our whole retirement income system, including both private and public pensions. Recent adjustments to the CPP have acknowledged the trouble ahead, but there’s been no move by policy-makers to tackle the problem as a whole. With unfortunate retirees and near-retirees bearing the brunt of the most recent lesson, we can only hope the fallout from this disaster will help avert another.