Ontario's taxpayers should not be on the hook for private pension liabilities

Of the 362 recommendations contained in recent report tabled by Don Drummond and the Ontario Fiscal Reform Commission, one that slipped under the radar was the notion of scraping Ontario’s Pension Benefits Guarantee Fund (PBGF). That is unfortunate because this is a critical recommendation for Ontario taxpayers.

That fund was established to protect beneficiaries of privately-sponsored defined benefit pension plans if the plan sponsor became insolvent and unable to meet its pension obligations. The fund currently guarantees up to $1,000 per month for covered employees, which is supposed to be financed by premiums collected from plan sponsors.

Memberships in defined benefit (DB) pension plans in the private sector has dropped over the past two decades in real numbers in favor of increasing enrollment in defined contribution (DC) pension plans. Thus, the proportion of Canadian private sector employees covered by DB plans has declined considerably over the past two decades, falling to 15% in 2010 from 30% in 1990.

The fund’s financial position has been and continues to be tenuous with the Ontario government stepping in and using tax dollars to cover the fund’s deficits on more than one occasion. For example, in 2002 when Algoma Steel was unable to meet its pension obligations the Ontario government transferred $330 million to the fund; another $500 million was transferred in 2010 when Nortel’s pension plan proved insolvent.

A 2010 report authored by actuaries at Eckler Ltd. on behalf of the Ontario Ministry of Finance concluded that “the PBGF is not sustainable in its current form.” and stated that, “expected future assessments are insufficient to cover expected future claims plus expenses.” The report noted that 73% of defined benefit pensions covered by the fund are not fully solvent. As of March 2011, the Financial Services Commission of Ontario reported the fund’s cumulative deficit was running at $6.1 million despite the most recent bailout.

Although Ontario is the only Canadian province with a fund guaranteeing private sector defined benefit pension plans, the problems it’s experiencing are similar to those of similar funds in other jurisdictions, including the United States and United Kingdom. Douglas Elliot of the Brookings Institute noted recently that the U.S. Pension Benefit Guarantee Corporation ran a deficit of $22 billion in 2009” and that there are “serious structural problems” with the finances in that fund. The UK’s Pension Protection Fund has acknowledged that it currently does not have sufficient financial resources to pay existing levels of compensation, is not yet self-sufficient and will not be fully funded until at least 2030.

Trying to guarantee private defined benefit plans via taxpayers also creates a moral hazard. The Ontario Expert Commission on Pensions noted the potential for the PBGF to induce “overly risky behavior.” Employers are tempted to make overly generous benefit commitments on the belief that difficulties in meeting future liabilities will be mitigated by the fund, or to follow the logic string to the end—taxpayers.

Dismantling the taxpayer-guaranteed fund will not result in significant hardship to DB plan members. Pension insolvencies typically result in reduced benefit levels but not in a complete loss. The more likely outcome when an employer is unable to fulfill their pension commitments is that the pension recipient will have to accept a ‘haircut’ in their benefits. The 15-to 30% reduction in benefits that Nortel pensioners experienced is a good example. The cut was unpleasant but not catastrophic for pensioners. Also, the reduction only applies to the private pension commitments between an employer and their employee. Other sources of retirement income like monthly Canadian Pension Plan and Old Age Security payments are unaffected.    

Low-income taxpayers without access to defined benefit plans should not be made responsible for, or continue to subsidize, insolvent pension plans in the private sector. Scraping Ontario’s Pension Benefits Guarantee Fund should be at the top of the government’s financial priority list.