Legislation on pensions could prove disastrous
The Gazette (Montreal)
Wed 20 Dec 2006
Page: B1 / BREAK

Section: Business
Byline: PETER HADEKEL
Column: En Ville
Source:
The Gazette

More than a few chief financial officers at Montreal-area
companies are feeling tight collars these days.

That's because the Quebec government has made their lives more complicated -
something governments have a knack for doing to the private sector.

The National Assembly last week passed Bill 30, Quebec's response to the
pension crisis that has left many private-sector retirement plans in deficit.

The legislation, among other things, calls for companies to set aside
substantial financial cushions to cover potential pension shortfalls.

Now, there's no question a lot of corporate pension plans are in trouble,
particularly ones that pay defined benefits to retirees.

In such plans, employees know in advance the amount of pension they will be
getting, rather than having to invest the money and shoulder the risk
themselves.

But by one estimate, about 70 per cent of the 900 such plans registered in
Quebec were in deficit last year.

You don't have to look hard to see why. Pension plans have gone through some
rough weather.

First came the stock-market crash of 2000, which battered the values of
stocks held in the plans. Then came a prolonged period of low interest rates
that made it difficult for administrators to match assets with future
liabilities.

All this could be termed a market problem. After all, stocks, bonds and
interest rates do fluctuate.

But the Quebec government has insisted on getting involved, in the belief it
can engineer a market correction on its own.

Bill 30's intentions may be good, but the new requirements it has imposed on
plan administrators are potentially disastrous, a number of analysts warn.

The new law specifies that in addition to keeping their plans solvent,
companies must keep a financial reserve to cover the degree of risk in the
plan's investment portfolio.

The idea is that the size of the cushion should vary with the degree of risk.
The problem is that the legislation doesn't spell out any kind of formula, and
regulators will have to write the rules.

As analysts Yvan Guillemette and William Robson of the
C.D. Howe Institute point
out, writing such rules could be extremely difficult.

How do you quantify the extra degree of risk that a pension plan might take
when it invests in such alternative assets as derivatives, real estate or
private equity?

The precise risks in such investments aren't easily understood by money
managers themselves, let alone Quebec civil servants.

The requirement to keep such a financial reserve, however big it might have
to be, will simply add to the cost of running the plan and provide one more
reason for companies to get out of the business of sponsoring them, Guillemette
and Robson say.

And that winds up hurting workers rather than helping them.

These plans were already in danger of becoming an endangered species before
Quebec stepped in.

Plan sponsors had grown wary of the risks, and many companies preferred to
run defined contribution plans, where employees are responsible for their own
investment returns.

Companies have soured on defined-benefit plans for several reasons.

One is the double standard that seems to apply when it comes to handling
deficits and surpluses.

When there's a deficit, everybody seems to agree it's the responsibility of
the plan sponsor to make up the difference.

But in the rarer cases where there's a surplus to be disbursed, agreement has
been much harder to achieve on whether the employer or the different groups of
plan members get to pocket the extra money.

Bill 30 says that the disbursement of a surplus must be done "in a
perspective of equity" between the different groups involved. Any payout judged
inequitable by 30 per cent of plan members can be formally contested.

But as the C.D. Howe analysts
observe, equity is a subjective matter.

One thing that seems sure to happen is there will be lots of fighting over
potential surpluses, which would discourage employers from increasing their
contribution rates to fund their plans.

The law threatens to suffocate pension plans and could well do more harm than
good, the C.D.
Howe analysts warn.

Montreal-based employer group Conseil du Patronat also is concerned.

"We are convinced the government could have chosen other means to improve the
financial health of defined-benefit plans," it said in a brief to the government
this fall.

[email-masked]

Edition: Final
Story Type: Business; Column

Length: 716 words
Keywords: EMPLOYEE BENEFITS; PENSIONS; PENSION FUNDS;
CANADA PENSION PLAN; CORPORATE ETHICS