JULY/AUGUST 2009

Pensions: Small Fixes — Big Problems Remain

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On June 23, 2009 the Province of Ontario released its long-awaited regulations on ‘solvency relief’ for pension funds. For those not familiar with this jargon, these are the detailed rules that explain how sponsors of under-funded defined benefit pension plans can delay cash funding during these recessionary times. The details of these rules are not the focus of this commentary.

Before the current recession hit, a number of Provinces had undertaken a complete review of their pension legislation. In Ontario this review was conducted by Ontario’s Expert Commission on Pensions led by Mr. Harry Arthurs, a former University President and law professor. Ontario’s review led to more than one hundred recommendations, many of which were for the implementation of more onerous standards of governance and the development of ‘large’ pension plans.

Absent from the discussion is how defined benefit pension plans can be improved to suit the needs of small and mid-sized businesses. While the great thinkers consider improvements that will have some impact on mega plans like those sponsored by our governments, no one seems to have turned their minds to the task of making defined benefit plans workable for the majority of private sector employers — thus leaving the majority of private sector workers without any retirement security.

Defined contribution plans, where employees ultimately receive a benefit based upon the contributions that they and their employer make and the uncertain investment income and annuity purchase rates that befall them, have grown prevalent. These programs, however, have been exposed for the flaws in their governance, costs of operation, and ineffective delivery of benefits. We are in the process of cultivating generations of retirees that will be ill-equipped financially.

Every employer needs to carefully consider workforce retirement and succession planning carefully. This planning must address questions of retirement income adequacy regardless of whether an employer sponsors a defined benefit plan, a defined contribution plan, or simply rewards employees with cash.