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Payment scheduling rules provide pension funding relief in Canada

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OTTAWA—The adoption of regulations to provide temporary funding relief for defined benefit plans in federally regulated industries in Canada creates more options for employers, but there are barriers to the widespread utilization of these options.

The new rules set out a range of options to help sponsors fund pension deficits caused by declining interest rates and changes to actuarial standards for the 10% of Canadian pension plans that fall under federal jurisdiction-primarily in industries such as transportation, telecommunications and banking.

Under the new rules, sponsors will be allowed to extend the schedule for funding deficits from five years to 10 years if no more than one-third of current plan members or retirees object to the change. In addition, sponsors can extend the funding period to 10 years if the difference between the five- and 10-year payments is secured by a letter of credit. They also will be able to consolidate previous funding schedules and repay the entire deficit over a new five-year period.

"These are temporary relief measures, albeit a step in the right direction," Canadian National Railway Co., a federally regulated Montreal-based employer with a contributory defined benefit plan, said in a statement.

The regulations promulgated by the Department of Finance Canada expire in 2019.

Pension funding rules often require significant contributions from sponsors with plans that have a deficit, so a 10-year funding schedule potentially could reduce a sponsor's yearly contribution by 30% to 40%, said Jerry Loterman, senior retirement consultant for Hewitt Associates Inc. based in Toronto. "These rules certainly provide a good deal of relief to many companies having cash flow problems."

The regulations strike a "fair and appropriate balance" between providing some funding relief for employers while protecting the pension benefits of their employees, said Paul Litner, chair of the funding issues task force of the Toronto-based Assn. of Canadian Pension Management, which represents plan sponsors in Canada. Some sponsors would have preferred a blanket 10-year funding schedule without conditions, he said.

While plan sponsors can benefit from consolidating payment schedules, the other options include conditions that few employers will be able to meet, consultants say. Using a letter of credit to secure the difference in payment levels, for example, can help certain companies, but organizations with significant profitability issues may have trouble securing an affordable letter of credit. "It's really great that they're providing this flexibility, but will it actually be used?" asked Randy Bauslaugh, a partner in the pensions and benefits practice of Toronto-based Blake, Cassels & Graydon L.L.P.

Earlier this year, Quebec enacted similar rules. "Our experience is not that many plan sponsors are willing to take advantage of those measures," said Michel St-Germain, an actuary with Mercer Human Resource Consulting in Montreal.

Other provinces have not taken steps to implement funding relief, although Alberta is considering similar measures. The absence of funding relief options in Ontario is particularly notable because the majority of employers and pension plans are based in the province. "They're just reluctant to make changes, especially one that may be controversial," Mr. Loterman said.

The federal government has not yet addressed one of the most controversial issues arising from a pension consultation conducted last year: the possible creation of a federal pension guaranty fund. The absence of a guaranty fund in the new rules, though, reflects the fact that creation of a fund would require legislative rather than regulatory changes, pension experts say.

Quebec considered and ultimately rejected the idea of such a fund, leaving Ontario as the only Canadian jurisdiction with a guaranty fund. Ontario officials announced last week that they will conduct a comprehensive review of the pension system, including an analysis of its guaranty fund.