A little-noticed change to B.C. pension law last year could have significant ramifications for some private sector employees in light of the pandemic. The government three months ago lowered the funding requirement on certain pension plans from 100% to 85% of their exposure.
The move was designed to encourage employers to continue with defined benefit plans — where the specific value of the eventual pension is predetermined — by making them less expensive to maintain over time. That expense has caused them to diminish over the years.
But the move increases the risk to some pensioners if their employers become insolvent.
Now an insolvent firm that suddenly has to wind up its plan could find it more underfunded than before, meaning smaller pensions.
That risk was minimized during the consultations on the changes. But insolvencies are much more likely now than they were when the change was made.
The public announcement of the changes on Dec. 12 stressed the advantages and said:
“Members’ pensions will not be affected by the reforms.”
The principle was to strengthen going-concern funding requirements, while reducing solvency funding. That’s the amount required to fulfill pension obligations if a company were to wind up operations on any given day, liquidate assets and buy annuities for the pensioners.
But the economic catastrophe created by COVID-19 outbreak changes all the expectations about insolvencies.
The changes took effect Dec. 31. A few hundred B.C. companies have defined benefit plans, as do virtually all public sector entities.
The changes may not impact public sector retirees, since their pensions are backed by government regardless of how much money is nominally in the plan.
Gary McCaig is a Port Alberni resident who was deeply involved in dealing with risks to pensioners during a financial crisis at the Catalyst pulp mill. He and other pensioner groups lobbied hard against reducing the minimum last year, to no avail.
He said Wednesday that companies who did strong valuations of their plans as of Dec. 31, during good times, won’t have to put any more cash in for some time, even though their value is sinking.
The yo-yoing markets make investment income impossible to predict.
He said today’s situation is a reprise of 2001 and 2008, when plans suffered.
The difference now is their eventual response to plan deficiencies will be less than it would have been before the change.
He estimated one million employees are in defined benefit plans, but the vast majority are in the public sector, where the risk is not as acute.
The changes free up billions in capital to be used for other goals. It’s hailed in many other quarters, but McCaig said: “They forgot about the people in private plans subject to this.
“When there’s no risk involved, it makes perfect sense.”
But now there’s much more risk of firms becoming insolvent, cashing out to buy annuities for the pension plan members and finding there isn’t enough money to cover what was promised.
McCaig said the impact won’t be immediate but will be a long-term effect.
The need for solvency funding was discounted during discussions about the change, he said.
“They basically said: ‘We’ve got a great idea. There’s one little wrinkle. So we’re just going to ignore that.’ ”
The fix would be some kind of pension insurance, in place in other countries.
Or having a government mechanism to allow such plans to continue operating in hopes of better days and a return to normal returns on investments.
Jock Finalyson, of the B.C. Business Council, said changing to going-concern valuations looks past the issue of companies suddenly going under.
Most private firms don’t have defined benefits, so it’s a fairly small slice of the economy, he said. The economic chaos will accelerate the move for firms to get out of them, which is just what the government’s changes were designed to halt.
The changes made in December freed up billions of dollars that are badly-needed now by companies. But they heightened the risk for thousands of private sector workers fortunate enough to have them.
They may not be as lucky as they thought they were.