The Pension Benefits Guarantee Fund is a program run by Ontario to protect pension benefits for Ontario workers where the plan sponsor becomes insolvent and becomes unable to fund all the promised benefits. I won’t get into all the mechanics of the program – but safe to say it is a pseudo-insurance program that isn’t properly priced and doesn’t provide the protection that workers really want or think they deserve. This came up recently with the Sears insolvency which I wrote about here and my partner Dean has written his criticisms of the PBGF here and here.
Houston, we have a problem
Dean isn’t the only one to figure out that the PBGF doesn’t work the way the average worker would expect and as a result Benefits Canada reported last week that “If re-elected, the Ontario Liberals are promising to expand access to workplace pension plans in the private sector, improving portability and creating opt-in options for the self-employed and other workers.” and “the party also said it will help ensure that pensioners are better protected and receive greater priority in the event of a bankruptcy.”
In my youth, I used to believe that when politicians made promises they both had a plan to meet those promises and that they intended to follow through on the plan. I am grown up now. The reality is that it is easy for politicians to make these kind of promises but delivering is actually much more complex than they are willing to admit. Don’t forget that this is the same government that looked at Ontario taxpayers with a straight face and said they would deliver on the Ontario Retirement Pension Plan even though they knew full well that it was an idea riddled with problems.
Fixing the Problem
If Ontario is serious about protecting workers’ DB pensions, there are three options that can work:
Option A – Ontario can run the PBGF like an insurance program and also cover all benefits, not just the first $1,000 or $1,500 of monthly pension. This would require underwriting of the employer solvency and charging premiums based upon the actual risk exposure to the fund. I don’t see this happening and frankly I am not in favour of hiring more government workers to build such a system.
Option B – the Bankruptcy & Insolvency Act can be amended to change the priority of unfunded pensions. Currently, pension deficits rank after secured creditors which means that in most insolvencies there is nothing left to top up a pension fund after the secured creditors, lawyers, and bankers all are paid. Unfortunately, there are two serious impediments to changing the BIA. First, changing the status quo is unfair to current lenders and will, to one degree or another, reduce the willingness of lenders going forward to support businesses with known unfunded liabilities. Second, the BIA is a federal statute and so Ontario has no say in this legislation.
Option C – Change the Pensions Benefits Act to demand greater funding levels of defined benefit plan promises. This is a nice idea but as Dean recently summarized here, Ontario is relaxing demands on plan sponsors rather than increasing them. Which direction is right is open to lots of discussion and debate – but it shows how disingenuous it is to tell voters you are going to do more to protect them when the truth is the opposite.
I don’t have much optimism that any of the options above can even be attempted let alone be successful. I have three new ideas that I think are worth discussing:
Idea #1 – Scrap the PBGF and tell people that DB promises are only as strong as the employer backing it – but at least you have a job. At least this way the regular worker can do their own thinking about the likelihood that their employer will deliver on its promises and the value of the benefit being promised.
Idea #2 – Change the BIA to improve the priority of pension deficits, but introduce the change by providing 25 years notice to be fair to lenders currently on the hook. It will take a long time to get there – but at least one day we will in fact get there.
Idea #3 – Require that the solvency deficit be backed by a letter of credit purchased by the plan sponsor (not the pension fund) and given to the pension fund as an asset. This would lead to proper underwriting of insolvency risks and would also motivate sponsors to step up and fund their promises more promptly.
I am not sure who in government really wants to fix the problem – but they should stop pretending they do and then do nothing about it. It’s time for governments to ‘put up or shut up’ on this issue and not leave the poor worker unprotected and ignorant to the fact that the government is willingly leaving them there.