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Thursday, November 09, 2006

Pension Legislation backgrounder for the media

Backgrounder for Media

November 9, 2006

The Issue
Current pension legislation requires that every pension plan be prepared to terminate at any moment (referred to as the “solvency rules.”) This means that many pension plans are required to set aside a portion of the employer contribution to fund the extra costs incurred on a plan termination that no one expects to happen.

In theory pension plans can terminate at any time. However, especially with multi-employer plans, it is very improbable. For the pension funds associated with the construction industry to fail, the entire construction industry would have to be in a state of collapse, which would mean essentially that the province itself had come to a complete grinding halt.

Because many pension plans are in industries that can reasonably be expected to continue long into the future, extra contributions to fund their wind-up serve no purpose except to reduce the value of the negotiated wage and benefit package.

The provincial government recently announced it has over $100 billion worth of construction projects slated for the next few years. Labour wages represent approximately half of this cost. It is conservatively estimated that the current pension fund rules will increase pension costs by $1.00 to $2.00 per hour over the next two to three years for many people working in the construction industry. We conservatively estimate that the cost of this pension fund regulation will be at least $1 billion.

Because the wage and benefit costs, including the pension funding, have already been fixed in contracts, the additional costs imposed by the solvency rules can only be funded by reducing benefits – both future pensions for current workers and in some cases pensions in pay for retired workers. Thus rules that are meant to protect workers and pensioners are actually damaging them, to the benefit of no one. To the extent that members have wage and benefit expectations, pension solvency contributions only add to the cost pressures in the wage and benefit package.

In response to similar concerns the government of Alberta recently allowed a three-year suspension on solvency funding. Given that Alberta and BC’s legislation in this area is almost identical, a three-year suspension can and should be enacted here in BC with the added caveat that this time be used to consult with the affected industry and pensioner groups.

It should be clearly stated that at-risk pension plans do need this protection, and benefit from the current rules, as was the clear intention when these rules were implemented. Rules exist to protect all pension plans.

Page Two

Plans that are not at risk do not need this protection, and should not be required to set aside these contributions. This requirement puts excess costs and pressure onto these well funded and stable plans. This forces business to divert much needed capital away from more productive use of their resources, depriving the economy of much needed reinvestment.

Harry Satanove has met with BC government regulators who have said they are willing to review each pension plan on a case-by-case basis. However the relief that the regulator might offer under current guidelines will not be sufficient in most cases. In the meantime these funds will still be obligated to collect these additional funds.

A three-year suspension, as Alberta has enacted would take significant cost pressures off BC employers and help protect pensioners, some of whom have already had their pensions rolled back by 10% to 25%. In some cases, the pensions were reduced solely because of the solvency rules. By other funding standards to which pension plans must comply, the pension plans were adequately funded.

A three-year suspension of the solvency rules poses no negative or adverse effects from either a political point of view or from the perspective of good public policy. Indeed, there are solid economic reasons for proceeding with a three-year suspension - as Alberta has done - while pension fund solvency regulations are reviewed as the current regulations are artificially driving up construction costs and acting as a drag on economic growth.

Further government inaction will hurt the BC economy and lead to more pension reductions for retired workers.


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