Wednesday, October 29, 2008

Deja Vu

Remember after 9/11 how the airline companies used that as an excuse to rescue their failed business practices? Well now it's the financial sector's turn:

'Disaster' unless Ottawa offers pension relief
Companies launch behind-the-scenes lobbying effort for temporary reprieve from pension funding obligations

From Wednesday's Globe and Mail

October 29, 2008 at 12:00 AM EDT

Canadian companies are lobbying the federal government for relief from their pension funding obligations as market turmoil drives down the value of their pension-fund assets.

Pension industry consultants and corporate executives have confirmed that a behind-the-scenes effort is under way to persuade the federal Finance Department to offer a temporary reprieve for a diverse array of companies and not-for-profit organizations. Among the voices lobbying the government is Nav Canada, which operates Canada's air-navigation system.

Some companies say they are facing possible financial devastation if they are required to immediately make enormous contributions to their pension plans to fund shortfalls.

“There are companies that would absolutely fold if they had to make contributions based on the provisions of the legislation as they stand now,” said pension consultant Jeff Kissack of Watson Wyatt in Toronto.

BCE Inc.

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One company executive, who spoke on condition of anonymity, said his firm cannot afford to fund the huge gulf in its pension plan, which was already a problem even before stock markets tumbled this fall. Since the beginning of 2008, Canada's benchmark S&P/TSX composite index has fallen about 37 per cent and Tuesday's surge will do little to offer much relief.

The executive said it cannot be the government's policy intent to act in defence of employee pension plans if it means fatally weakening companies that would otherwise have no other financial problems.

“If you actually force some of those companies out of business, it would be a disaster for the poor pensioners who only get 70 cents on the dollar or 80 cents or whatever it was at that point,” the executive said.

“It's not asking for a tax break or a bailout or a handout. … You're really saying let us use the money earned within the company and being spent to do the best things for people's jobs and for the company in the long run.”

The Office of the Superintendent of Financial Institutions, which oversees about 1,400 federally regulated pension plans, confirmed this week it has met with companies concerned about the impact of the current market turmoil on their defined benefit pension plans.

Judy Cameron, managing director of OSFI's private pension plans division, said OSFI is “monitoring the industry very closely” and is talking to some plans about their funding issues. But she said it is not within OSFI's powers to change funding regulations for plans whose investment holdings have dropped in value.

Such decisions would come from the federal Finance Department, which has not yet offered any commitments of support.

However, a Finance official said Tuesday the department has had a history of providing help to pension funds in difficult circumstances, offering temporary relief in 2006, for example, to help plans cope with funding shortfalls built up earlier in the decade. That relief has since expired.

“The government is closely monitoring developments related to pension funding,” the official confirmed.

One solution proposed by companies would be a temporary extension of the time limit for funding pension shortfalls, increasing it to 10 or 15 years. Companies currently have five years to make up shortfalls.

Another proposal being weighed by Ottawa would give companies a reprieve from doing a pension solvency valuation at year-end, which would help them avoid recording and “locking in” their lower asset valuations for required funding purposes.

Pension funds normally have to do a valuation of their obligations and assets every three years, then plan sponsors have five years to fund shortfalls. However, once federally regulated funds are in a shortfall position, OSFI requires valuations to be done annually.

Ms. Cameron said about half the pension plans OSFI oversees were in a shortfall position prior to this year, so are doing valuations annually. That means a majority of Canada's federally regulated pension funds will be required to do a valuation report at Dec. 31 this year, giving companies no leeway to wait to see whether asset values recover over the next year or two.

Another pension industry expert said the funding situation is especially exaggerated because pension funds are required to measure their obligations and assets on a “solvency” basis, which assumes a company is going to shut its doors immediately and must fund its pension now.

He said the calculation is artificial for most companies that are in good health, but they must nonetheless make large contributions to allow for this worst-case scenario.

“Before the market turmoil, this was a big issue, but now it's much worse,” he said.

Ron Singer, a spokesman for Nav Canada, said yesterday his company is one of the voices urging Ottawa for pension relief, especially regarding the unpopular solvency level funding.

“We are very concerned about the kind of regulations as they apply to solvency – as are most federally regulated companies that have defined benefit plans,” he said.


dennisn said...

Am I correct to infer that you are bashing government forcing of companies to pay into particular (pension) funds? That the government has no business telling other businesses how to run their business?

(I always wonder how much such government coercion is crippling society--how many people are discouraged from becoming doctors, knowing that their incomes and jobs would be dictated by government, or from becoming businessmen, knowing that they would be forced to give away large chunks of their pie.)

m5slib said...

I'm bashing these companies who now seek corporate welfare after acting irresponsibly even though they knew what their obligations were. This whole pension shortfall isn't a new thing, but now when there's a big economic downturn to mask their incompetence, they run to the gov't.

dennisn said...

Umm, as far as this article/issue is concerned, they're not seeking "corporate welfare"--nor are they actually "running to the government [for help]"--they simply want to get the government off their backs, to stop it from forcing them to maintain the pension obligations that they may/may not be able to maintain.

I'm not saying that a lot of companies aren't running to the government for welfare (ie. the absurdly backwards auto industry), and this is indeed worthy of bashing--but the government is equally culpable for being an accomplice--it should never even entertain the idea.