TORONTO—Canadian employer groups are lobbying an Ontario pension task force to encourage plan sponsors to maintain defined benefit plans by eliminating partial plan windups and giving employers exclusive authority to decide the use of surplus funds.

Unions strongly object to such changes in Ontario's Pension Benefits Act, saying partial windups offer critical protections to plan members, who also have a say in using excess funds.

The Ontario Expert Commission on Pensions was appointed last year to review the law and its rules governing funding, deficits and surpluses of defined benefit pension plans. The commission held public hearings in several Ontario cities over the past month to get comments for its report, which will be filed with the Ontario minister of finance next summer.

While observers agree that defined benefit plans are critical to the Canadian retirement system and changes are needed to encourage employers to establish and maintain them, there is significant disagreement between employers and unions on how to strengthen the defined benefit system.

High on the list of priorities for Canadian plan sponsors is removal of the Ontario law's provision allowing partial plan windups, or terminating part of a pension plan and distributing assets related to that part of the plan.

Employer groups such as the Ontario Chamber of Commerce and Financial Executives International Canada advocated eliminating partial plan windup provisions from the legislation.

Steve Eadie, chair of the OCC Pension Task Force, cited numerous problems with partial plan terminations, including that sponsors are required to pay out any surplus related to the partially wound-up portion and that members affected by a windup often receive increased benefits at the expense of other members. "The partial plan windup rule is an attempt to provide them more than 100 cents on the dollar," he said.

If the provisions are not eliminated, employers suggested implementing more restrictive conditions, including eliminating the regulator's discretionary power to order a partial windup when a business restructuring occurs, such as a downsizing program or plant closures.

The issue of partial plan windups was thrust into the spotlight by a controversial Supreme Court of Canada decision in Monsanto Canada Inc. vs. Ontario (Superintendent of Financial Services), which required that surpluses be distributed in partially woundup pension plans (BI, Aug. 9, 2004).

Partial windup provisions, though, provide regulators with flexibility and prevent an employer from keeping a plan active simply to avoid windup responsibilities, according to the International Assn. of Machinists and Aerospace Workers, which has more than 10,000 active members in Ontario.

"I think it's safe to say that we won at the Supreme Court and we're not likely to change our mind" on partial windups, said Wayne Samuelson, president of the Ontario Federation of Labor, the umbrella organization for Ontario trade unions, which intervened in the Monsanto case.

The Monsanto decision highlighted what Canadian employers refer to as the asymmetry of pension surplus/deficit ownership—in which sponsors must pay off plan deficits but may not be entitled to surpluses, which is widely seen by employers as a disincentive to adequately fund their plans.

"Plan sponsors should have the same right to own pension surplus to the extent they own plan deficits," said William Hewitt, a member of the issues and policy advisory committee of FEI Canada.

The Ontario Federation of Labor, though, proposed that the PBA be amended to allow no employer contribution holidays unless a plan has a surplus margin of at least 10%. In addition, any use of surplus should be approved either by plan members or their unions, the organization said, citing a 2005 Shareholder Assn. for Research and Education report that concluded that employer contribution holidays contributed to pension deficits.

Contribution holidays, employers argue, are often beyond their control, citing federal tax law that disallows contributions to plans beyond 110% of funding levels.

Another top priority for plan sponsors is eliminating grow-in provisions from Ontario's pension legislation. Grow-in rights entitle certain employees of woundup plans to any early retirement benefits they would have been eligible for had the plan and their employment continued.

Ontario and Nova Scotia currently are the only Canadian jurisdictions with grow-in rights, although Nova Scotia recently removed a requirement to prefund grow-in benefits.

There is a "very strong possibility" that the Ontario commission will recommend changing grow-in provisions because of their absence in other jurisdictions, Mr. Eadie said. "It creates a very unequal playing field."

Union officials, meanwhile, advocate amendments to Ontario's pension law they say will enhance the value of pension benefits for employees. The Ontario Federation of Labor wants to mandate full indexing of pension benefits, citing a study that found 83% of private defined benefit plans have no inflation protection. "Without indexing, inflation will continue to erode retiree pension benefits," the OFL said in its submission to the commission.

Indexing pension benefits should be left up to the sponsor, subject to collective bargaining, according to the Assn. of Canadian Pension Management, which represents plan sponsors in Canada.

Several unions propose raising the maximum payout of Ontario's Pension Benefits Guarantee Fund from about $1,000 Canadian per month to at least $2,500 ($1,076 to $2,689). They also promote increasing the mandatory cap on employer premiums, currently between $4 million Canadian to $5 million Canadian ($4.3 million to $5.4 million) per year, while employer groups support revamping premiums to reflect risk factors such as an organization's asset profile or creditworthiness. Ontario is the only Canadian jurisdiction with a guarantee fund.

One issue employers and unions agree on is amending Ontario's pension law to encourage adoption of multiemployer pension plans. These arrangements have numerous advantages for smaller employers, including efficient plan administration and pooling of risk, said Scott Perkin, president of the ACPM. "We believe the legislation itself needs to be more flexible, more accommodating of different arrangements," he said.