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Canada refuses to play games with DB pensions

Canada refuses to play games with DB pensions

Stephen Harper’s government has done Canada proud by resisting the temptation to follow the US down the path of relaxing financing rules for defined benefit (DB) pensions.

The changes, that came into force last month in the US, alter the way companies calculate contributions to their pension fund, effectively reducing the number of pension funds that are officially in deficit and therefore makes the pension situation look far better than it is.

When will politicians learn that they cannot sort out major financial problems by accounting sleight-of-hand manoeuvres? Changing the rules to lower official funding levels does not secure the future of the retirees by one cent.

In fairness to the Obama administration, they are not the only ones dealing with this exact DB funding problem. Other countries in Europe have either made changes or are seriously considering it.

Thankfully, the federal government in Canada has set its face firmly against this course. Finance Minister Flaherty has been very clear in stating that the resolution to any funding crisis is a private matter between a company and its employees and not one that involves the federal government in any way.

What the federal government seems to grasp, that is being missed by the majority of G20 governments, is that relaxing the funding rules is actually putting pensioners at a higher level of risk than keeping the funding levels as they are. Can you really believe that any company which has been allowed to reduce its funding of its pension scheme will increase its contributions even if its personal situation improves? Why should it when the lower regulations give it a clean bill of health in terms of pension funding?

Looser funding regulations will allow these pension schemes to run permanently underfunded by today’s standards. Worse still, as soon as the trading conditions move onto a down cycle again, the pressure to reduce the funding even further will be greater. Ultimately, the number of funds collapsing will increase and pensioners would lose out, as would the taxpayer to the extent of the funding provided via the distressed pension plan model.

Resisting the pressure that it coming from the larger Canadian corporations is impressive as it is reckoned that over 90% of the 400 largest funds are currently in deficit. The temptation must have been great to give in to that level of pressure and put the taxpayer on the hook. Harper’s government deserve credit for insisting that corporations try to sort out the mess themselves.

Canada has gained a great reputation as a good place to do business over the last half-decade and has been rewarded by a far easier ride through the global recession. A prudent approach to financial affairs has paid off. Bailing out the over-promising of large corporations would be to squander the hard-won gains of the Canadian taxpayer. It is to be hoped that Minister Flaherty can hold the line against the ever-increasing pressure from large corporations looking to be saved from their own mismanagement.

Tom Murray

Twitter: @TomMurrayDublin

What do you think? Is the Canadian government right not to relax regulations around defined benefit funding? Let us know in the comments below!

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