CANADA - The Canadian government is mulling the idea of establishing a federal pension guarantee fund on the lines of the Pension Benefit Guarantee Fund (PBGC) in the US and the Pension Protection Fund (PPF) in the UK.
The idea has been mooted by the Ministry of Finance in a major consultation paper on how to strengthen the legislative and regulatory framework for defined benefit pension plans registered under the Pension Benefits Standards Act (PBSA) in order to improve the security of pension plan benefits and ensure the viability of defined benefit pension plans.
“The Government of Canada is seeking views on the viability of a federal pension guarantee fund including any comments on its possible design, operation, and powers,” the ministry said in its consultation paper.
One of the “attractions” of such a guarantee fund was that it would provide pension compensation to employees, retirees, and beneficiaries if an employer becomes bankrupt or insolvent and its pension plan is underfunded.
“A Pension Benefit Guarantee Fund (PBGF) may also reduce the propensity of employees from leaving companies experiencing financial difficulty because employees have greater confidence that the PBGF will provide them with benefits in the event that their employer becomes bankrupt,” the ministry added.
However highlighting some of the potential drawbacks, the ministry noted that a PBGF could provide a disincentive for employers in financial difficulty to properly manage their pension plans to control risks if their pension liabilities will be covered.
It may also be difficult to efficiently spread the insurance risk in a PBGF at the federal level because federally registered pension plans account for only 10% of pension plan assets in Canada, with 10 plans accounting for about 63 per cent of the assets.
Other areas that the ministry is seeking views are:
- On whether the dispute settlement mechanism for surplus distribution contained in the PBSA requires improvement or clarification.
- On whether there are alternatives to address funding issues other than relaxing funding requirements. For example, would special accounts for pension plans be feasible?
- On whether should there be greater disclosure provided to plan members regarding a plan sponsor’s financial condition, funding decisions and contribution holidays and how this may be done. - On full funding on plan termination, and in particular how it should be applied to financially vulnerable sponsors.
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