Monday, May 01, 2006

Onerous rules robbing pensioners

One of the inefficiencies of government is the “one size fits all” approach to government regulation. A case in point is with regards to pension fund solvency rules. Government is well aware of the fact that the front end of the baby boom is within five years of retiring.

In order to protect pension holders regulations were adopted where pension funds had to set aside funds should the pension plan come to an end. That is fine when dealing with an employer who may or may not be around in 10 or 20 years time, but when you are dealing with an entire industry sector, such as the construction industry then these rules start to get a tad ridiculous.

Currently even healthy pension plans are being forced to raise premiums and/or reduce contributions just to fund the costs of a sudden plan termination that not even government regulators themselves ever expect to have happen.

Current provincial government legislation requires that every defined benefit pension plan be prepared to terminate at any moment and meet all of its obligations to both pensioners and members who are still of working age.

Plans deemed to have a deficit, even when they can easily meet all of their obligations, are thus required to set aside extra contributions in order to be “fully funded” within five years.

The net effect is decrease the wages of employees, and the benefits of pensioners, in order to place a significant amount of money into a dead pool of capital that in many instances will never be needed.

The Harper government in Ottawa has recently acknowledged that that the rules for federally regulated pension plans are too onerous. His government has pledged a range of relief measures including extending the solvency payment schedule to 10 years.

The Campbell government has so far made no such similar promise. In fact right now the issue is being passed like a hot potato between Finance Minister Carole Taylor’s policy and regulatory branches. The policy branch is saying regulators can use their discretion while regulators are saying that current legislation does not provide any criteria for determining such matters.

Many pension fund managers in BC are recommending the development of a risk-based system so that high-risk plans continue to be required to correct solvency problems under the current rules, moderate-risk plans face less stringent rules and low-risk plans are not required to fund hypothetical solvency deficiencies.

But any such regulatory change would have to first be developed by the policy branch of the Ministry of Finance and the policy branch will not undertake such an initiative unless it is deemed to be a priority of the Minister.

That requires getting the attention of the Minister of Finance, Carole Taylor on an issue that can be daunting in terms of its complexity. But it is an issue the provincial government must come to grips with. Otherwise many British Columbians will continue seeing their pension benefits being eroded through government over-regulation and inaction.

It is expected that the Minister of Finance will find some time over the summer to meet with Pension Fund Mangers. If she does let us hope this is followed up with a signal to her Ministry policy branch to start looking at developing a pension fund risk assessment system.

Developing such a system will not be easy, but like most good government policy it is best developed with input from experts in the sector. If this approach is taken and a new risk assessment based system is adopted then this will allow for greater take home pay for workers and improved pension benefits for retirees.

It may not be politically sexy but it is good government. Providing good governance is something Finance Minister Taylor has shown herself to be quite adept at providing when it comes to issues such as labour relations. Let’s hope she can do the same when it comes to workers’ pension funds.