Should The Government Bail Out Pension Plans?

by Mike Holman

Canadian Capitalist wrote a very interesting post yesterday highlighting the fact that there are some disabled former Nortel employees that paid into the “self-insured” LTD (long term disability) plan offered by Nortel and now might lose their benefits.  As Thicken My Wallet pointed out in the comments – this basically a loophole in the law – the contributions made by the employees that were in the LTD plan did not belong to Nortel and shouldn’t be considered part of the assets available to creditors.

Ram correctly points out that the government should fix this – I find it ridiculous that they were able to change the RIF minimum payment rules last year thanks to CARP’s constant nagging which was a complete waste of time yet something important like this can’t get changed.  Even though I said differently in the comments (since I didn’t fully understand the situation prior to TMW comments) I agree that the government needs to help those people and fix the rules on this matter.,

That said – I still want to talk about government bailouts of company defined benefit pensions!

One of the big problems with government bailouts of company pensions is that is that those are private contracts or “deals” between the employee and the company – often via a union.  It has nothing to do with you or me or the government.

Technically it’s not anyone else’s responsibility to help someone who made a private deal with a company and it didn’t work out.  It’s the same thing as if someone had all their investments in their own company stock and it goes bankrupt.  Anytime you make a long term deal with someone else then you face the risk of the other party not fulfilling their end of the bargain.  Whether it’s your pension or a lawn care contract – it’s your responsibility.

Now I’m not so hard-hearted that I think these people shouldn’t be helped at all – I would have no problem with the government helping them out if necessary.  But what I would really like to see are some changes for the future to prevent it from continuing to happen.

Some suggestions

Outlaw employer-run defined benefit pensions.

This is a bit extreme but it does take care of the problem where employees base their financial planning on an expected pension and run into trouble if the pension is reduced (especially if it reduced to zero).  Most workers use some combination of rrsp, tfsa, CPP and OAS for their retirement so it’s not like there aren’t alternatives to defined benefit pensions.

Allow opting out of defined benefit plans.

One problem that exists now is that normally someone working for a company that provides a defined benefit plan has to participate in it.  This doesn’t give the worker any choice in their pension since the contributions made by the employer and employee count against any RRSP contribution room so the employee might not be able to save enough outside the company pension.  Allowing the employee some choice will give the employee more responsibility and will reduce the obligation for the government if things go bad.

Only have government run DB plans

In this case companies would not be allowed to run their own plans but could participate in a government run (the CPP would run it) pension plan.  The main difference is that the liability would be on the government so everyone who participates in these plans would be on equal footing.  These plans would also be fairly conservative so they might not be as overly generous (and risky) as some existing pension plans.

Employee education

I think this one is a complete pipe dream but if you could educate the employees that:
1)  Their pension plan is only as solid as the company and the pension management and things don’t always work out.  The pension might not be there for them in the amounts promised.
2)  Saving outside their pension might be a good idea.
3)  Buying company stock is very risky because they work there too.

Don’t allow employees to own company stock

This one has nothing to do with pensions but always seems to come up when public companies such as Enron go out of business.  This is too hard to regulate and really falls under the category of “education” but it would be one way to force employees to diversity – Bad Money Advice had an excellent article regarding the follies of owning company stock. Bottom line is that you shouldn’t own any – if you do have some because of special deals/payments etc then sell it as soon as you can.

Conclusion

While I do feel bad for employees and retired employees who have retirement plans go bad – bailing out each group when they run into problems isn’t the answer.  Leaders of public companies have shown that they manage for one reason and one reason only – for the mega-bonuses they can get if the company outperforms.  They generally do this by taking extra risks – worst case scenario is that they get let go with a big severance package.  Or sometimes they just cook the books to make more money for themselves.

If you favour more regulation then don’t let these companies be responsible for the future of their employees.  If you favour less regulation then give employees some education on the risks of having a company pension plan and allow them to opt out.

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{ 7 comments… read them below or add one }

1 Canadian Capitalist

I agree that Government should not bail out DB plans. It may seem like a contradictory stance but DB plan beneficiaries in bankrupt companies *may* experience a short fall. They are not wiped out. LTD beneficiaries, who are often very sick, may receive nothing.

I don’t entirely agree that Government has no business getting involved in private contracts. Surely, Government has a role to play in preventing predatory practices by large companies who have much more resources than the little guy. Of course, we don’t want too much regulation either. It is a delicate balancing act.

2 Thicken My Wallet

How about actually enforcing the law? Federally regulated pension plans fall under the Pension Benefits Standards Act 1985 which is regulated by the Office of the Superintendent of Financial Institutions (OSFI)(there is similar legislation and regulators in each province). The acts clearly set out time lines to make up pension shortfalls (I believe it is10 years for federally regulated industries with defined pension plans) and OSFI can provide temporary relief from the requirements (for example, it gave Air Canada more time to make up its funding shortfall the last time it restructured).

There has been a large corporate lobby to extend relief from the solvency requirements under the reason that a company would destroy shareholder value by fully funding DB pension obligations.

If you enforce strictly, the employees gain at the expense of increasing shareholder value (so the theory goes). If you don’t enforce properly, the shareholder is benefitting at the expense of the current and future employees. If you make both employee and shareholder win by a government bail-out, the taxpayer loses.

So, what poison do you pick (and, more importantly, how the heck did we get to this and what can we learn?)?

3 Four Pillars

TMW – good point about the government relaxing the laws.

Part of the problem seems to be that sometime employees (particularly in unions) get pensions that are just “too good”. Companies shouldn’t give them but sometimes they do when times are good.

4 GeoffOT

Mike left out what I consider to be the most obvious of solutions to this particular problem. That would be to still allow companies to self-insure BUT to simply require that any such operation be required to meet with the financial requirements and comply with all of the regulations that are imposed on the insurance industry that sells products to the public. If that were the case, then there would be the same safeguards and reserve requirements that a “real” insurance company has and it would put the burden of figuring how to continue the policies into regulatory hands.

5 Terry Johnston

I too have mixed emotions about bailing out private deals — but if the government failed (as the most often do in these cases) to ensure rules – guidelines were being followed. It’s sad to leave some poor pensioner in the lurch.

Why can’t the government mandate that pension money would be ‘first creditor’ above all others — taxes, bond debt, share holders, bank loans, etc. if an insolvency occurs.

No company could get a dime of financing unless they could prove the pension funding was up to snuff either from the Banks or the markets and once passed the government is no longer involved.

6 GeoffOT

Companies should not be allowed to be in the “insurance business” (even if only to their own employees) unless they subject themselves to the same regulations that govern/restrict/protect insurance companies.

7 tucson cpa

If this ‘corporation’ – that D.C. was meant to be – doesn’t start running itself on the simple, fundamental principles common even in household accounting – we’re all in trouble!

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