October 27, 2009 / 6:44 PM / in 8 years

Canada plans new rules for private pension funds

OTTAWA (Reuters) - Canada unveiled new rules for private pension plans on Tuesday, promising increased protection for members and reduced volatility in funding corporate obligations.

Finance Minister Jim Flaherty said in a statement that the government plans to restrict an employer’s ability to take a holiday on contributions to federally regulated pension plans unless they keep a 5 percent funding cushion.

Companies must base their funding requirements on a three-year average to reduce volatility, and they must fund pension benefits fully if a plan is terminated.

The government will also increase the pension surplus threshold for federally and provincially regulated defined benefit pension plans to 25 per cent from 10 per cent.

“While some of the proposed changes can be introduced by changes to regulation, others will be implemented by legislation, which is expected to be introduced in Parliament,” the statement said.

Flaherty later told reporters that Ottawa and the provinces also plan to examine the question of whether employee pension plans should have priority in the case of bankruptcies.

Telecoms equipment maker Nortel, for example, is under bankruptcy protection and its former employees have complained loudly that their pensions were not protected.

“This is not simple, because when you’re dealing with bankruptcy law you’re dealing with priorities, and priorities of creditors, and that can affect the ability of companies to borrow and carry on their businesses,” Flaherty said.

“So this is not a simple matter, but yes, it’s something that needs to be reviewed.”

Most of the changes announced on Tuesday apply to federally regulated private pension plans -- including those from banks, airlines and telecom firms -- which the government says represent about 7 percent of Canadian pension plans.

The change to the surplus threshold applies to all plans since it involves a change to the federal Income Tax Act, and Flaherty said it was designed to help companies save in a tax-protected way in good times, to prepare for lean times.

Pension plan managers and federal regulators have worried in recent years about the health of private pension plans, given historically low interest rates, an aging population and now the crash in financial markets.

And many firms have looked for ways to delay making their contributions.

These include Air Canada, which reached a deal earlier this year with its unions and retirees for a moratorium on funding its multibillion-dollar pension deficit until 2011.

Flaherty told a parliamentary committee on Tuesday that the insolvency ratios in some pension plans had improved in recent months as equity markets rebound.

But Liberal Member of Parliament John McCallum told him that the changes came too late, as many pension plans are in deficit and are not bumping up against surplus limits.

“The problem with doing this now is that the horse is out of the door,” he said.

Additional reporting by Frank Pingue and Jeffrey Hodgson in Toronto; editing by Janet Guttsman and Rob Wilson

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