Fixing the Pension Benefits Guarantee Fund

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.

Fresh Thinking

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.

Joe Nunes
Joe Nunes
Joseph Nunes, Co-founder and Executive Chairman of Actuarial Solutions Inc, has practiced in the area of pensions and retiree health plans for over 30 years. He has experience with many types of plans including single-employer, multi-employer, private sector, government, unionized, non-unionized, as well as registered and non-registered executive plans.

3 Comments

  1. Patrick Flanagan says:

    Good post Joe. It is interesting to note that the PBGF was set up by the PC government of Bill Davis, with the charge led by Robert Elgie. Of course, before acting, they sought expert advice, and were told that, based on the US experience, it was a dumb idea and should not be pursued. We are fortunate that in the present era, no political party would put political expediency ahead of rational public policy.

  2. MelbNorton says:

    I like the 3rd option – which should be mandatory.
    I would like the second option if modified to place pension fund deficits between old (and non-amended/extended) debt and new amended/extended debt
    As another option, I would prioritize all normal-form pension rights (excluding indexing) and then add enhanced early retirement options and indexing as forfeitable rights to be funded from residual assets.

    If I could find the smiley emoji, I would also suggest lawyers and others only get paid Minimum wage rates until pension participants get all promised benefits

  3. Bob says:

    First of all, the PBGF was created not by anyone involved in pensions and was a poor decision. To some degree one of the reasons to kill DB plans is the guarantee fund. If the sponsor put the premiums into the fund or if not the DC program, the plans employees would be better off.

    As to funding, up until the late 80’s, funding assumptions were conservative, as we approached 90 and after, plan sponsors put the pension funds at greater risk by raising interest rates and as surplus was created and/or funding obligations reduced. Thus less money was put into the plans. Even as interest rates declined the assumptions were not decreased as fast as they increased.

    The inevitable had to occur especially as the population aged and the populations of retirees and deferreds grew, solvency deficiencies became the norm. So we spend all of our efforts trying to let the sponsors off the hook. Now we are working to further reduce the cost to the sponsor by transferring risk to the plan members. Of course this will not work well if the member leaving the plan understands the issue. For example, in the UK, CV’s are adjusted based on funded status, the end result is that few transfer because they prefer the pension promise.

    Derisking would therefore cost the plan the full CV if it decided to purchase the deferred annuities.

    The current system allowed the plan to pay out the CV based on the funded status and then pay the balance over the next 5 years as per the funding of the solvency deficiency, few used this but we complain about paying out the full values at termination.

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