Pension plan flexibility to the rescue

News flash, fellow tax slaves: there’s light on the pension horizon for B.C. companies, taxpayers and working stiffs.

Not a minute too soon, either. Bad news on that front has been flowing like a river onto front pages, through newscasts and into your office waiting room for months.

Good reason for that, mind you.

As the Canadian Federation of Independent Business (CFIB) recently pointed out, Canada’s pension system “is a disaster waiting to happen.” The business organization estimates that the unfunded shortfall of public pension plans is set to eclipse $300 billion, “which is equivalent to $100,000 per government employee, or $9,000 for every man, woman and child in this country.”

That’s a little rich, even for the fiscally deluded in this land.

Private companies aren’t doing much better as meagre to non-existent investment returns from equity markets sock it to defined benefit plans.

For example, according to credit rating agency DBRS, the list of Canadian companies with the most underfunded defined benefit pension plans (underfunded amount in brackets) includes Air Canada ($2 billion), BCE ($1.5 billion), Ontario Power Generation ($1.3 billion), Canadian Pacific Railway ($673 million) and BC Hydro ($364 million).

So anything upbeat on the pension front will be music to corporate ears – even if said sounds are resonating around something as dry as the Pensions Benefits Standards Act. Not much of an icebreaker at your early summer garden party, but the act is set to undergo some significant overhaul that could help ease the financial pension pain for B.C. companies and brighten retirement horizons for their employees.

Key among the changes, which would come into effect sometime around the summer of 2013, will be what Lawson Lundell partner Lisa Chamzuk says will be a new flexibility in how employers can set up pension plans.

In the current landscape, those plans fall into two rigid camps: defined benefit (DB) and defined contribution (DC). They differ in a number of ways, but here’s the Coles Notes version: DB puts the onus on the employer to deliver a set pension payout amount at retirement, regardless of how well the plan has performed in the investment market; DC, on the other hand, shifts most of the risk onto employees, who pony up a defined contribution and get back whatever that contribution manages to eke out in the same investment market.

Pretty much all or nothing for the employer behind door No. 1 or all or nothing for the employee behind door No. 2.

The PBSA overhaul, however, will allow employers to work with employees to craft pension plans that have targeted benefits, but rather than being on the hook for that benefit regardless of economic climate or investment returns, the company will have the flexibility to adjust the benefit based on fiscal realities.

That shares the risk more equitably between employer and employee, which in turn will make pension plans more palatable for employers, many of whom have opted out of employee pension plans in recent years, by providing them with more cost certainty.

It will, as Chamzuk points out, “make employers who have traditionally shied away from defined benefit plans more interested [in those plans] again.”

In short, it will get them back in the pension plan game.

That would be a huge plus for employees, many of whom in the private sector now have no pension plan at all.

It will make retirement more affordable. For some, it will make retirement possible.

In the current state of the world economy, that possibility has been getting more elusive with each passing month. •