The Stel Salaried Pensioners Organization wishes to thank The Hamilton Spectator for permission to post the following article by Reporter Sandra Cordon, published in the March 27 2006 edition

How safe is your private pension?

Many plans are underfunded and the future could be grim

By Sandra Cordon
The Canadian Press
OTTAWA (Mar 27, 2006)

The financial health of struggling private pension plans "declined markedly" last year and the outlook for 2006 looks even worse, senior federal regulators have warned Finance Minister Jim Flaherty.

Historically low interest rates, stricter standards and rising pension costs are worsening an already difficult situation for pension plans, the federal pension regulator warns in documents obtained under the Access to Information Act.

Some pension plans may even be given permission to reduce benefits that were previously promised to retirees, say the documents prepared by the Office of the Superintendent of Financial Institutions (OSFI).

"Interest rate declines through 2005 and the introduction of a new actuarial standard will result in significantly higher funding requirements for most defined benefit pension plans in 2006," warn the briefing notes dated Feb. 6.

That means a rise in the number of pension plans on a watch list for close monitoring by OSFI. There were 84 troubled pension plans on the list at the end of last year, up from 75 listed in September 2005.

"Unless significant positive changes occur in the environment, we expect the financial strength of pension plans to deteriorate further and the number of plans on the watchlist to continue rising during 2006," say the documents.

Ottawa will likely have to offer some relief for plans and their sponsors, OSFI said.

The briefing material warns 72 per cent of private pension plans were less than fully funded as of June 2005, a dramatic jump over the 53 per cent of plans in the same fix just six months previously.

"Falling (and) historically low long-term interest rates and new actuarial standards are creating such a spike in contributions to pension plans that short-term relief for corporate sponsors seems necessary," says the material.

Just how the federal government can help is being considered as part of a major review initiated by the federal Finance Department almost a year ago, says Karen Badgerou-Croteau, managing director of private pensions at OSFI.

"The Department of Finance and government will ultimately make the decision as to what sort of relief, if it goes that way at all, would be appropriate for the industry," she said in an interview. Extending to 10 years the current five-year deadline for paying pension shortfalls was among the suggestions in about 120 submissions made last year to the federal review.

Much less popular was a government run insurance scheme that plans would pay into in case one fell into bankruptcy.

Any change to pension laws may be stalled by the change of government.

A handful of pension plans may even be given permission to reduce benefits previously promised to retirees and workers, the OSFI documents say.

"OSFI is receiving more requests by pension plans for reductions in benefits as plans look for ways to deal with increasing funding requirements.

"In many cases, these reductions in benefits affect both active and retired members."

In previous years, OSFI was rarely asked to approve benefit reductions, said Badgerou-Croteau.

Such requests are only approved, "very much as a last resort," although that doesn't mean the sponsor must be in or near bankruptcy, she added.

Most of the seven plans now seeking approval to cut benefits were structured in such a way that certain benefits -- for example, indexing payments to inflation -- were always intended to be open to negotiation.

Known as "negotiated cost defined benefit plans," they are designed so benefits could be reduced when funding is tight -- if OSFI approves, she said.

Another three plans are poised to ask permission to cut benefits, "so we know more are coming," she added.

Defined benefit plans across industries and around the world have been crushed in recent years by poor market returns, very low long-term interest rates and a rising number of retirees who live longer and draw benefits for longer periods than in the past.

Defined benefit plans have faced particular funding crunches because they guarantee a certain benefit to retirees, regardless of market conditions. That means companies must constantly ensure they have the money set aside to meet those promises. In contrast, defined contribution plans -- which are becoming more popular -- don't promise any particular pension.

They merely set the amount of contributions that companies must make.

OSFI oversees private pension plans covering workers in federally regulated areas of employment.