Canadian Lawyer InHouse

Pension reform 'tsunami' "There's a tsunami of pension reform that has been happening in the last couple of years," says Melissa Kennedy, general counsel and senior vice president of corporate affairs at the Ontario Teachers' Pension Plan. As a result she is "being corralled"more and more by her general counsel colleagues and asked about pension reforms. "They are talking about pensions more than the general counsel community ever did." Elizabeth Boyd, a pension lawyer at Blake Cassels & Graydon LLP, agrees, adding "there has been a dizzying array of changes. It's tough to keep up." Experts say there are three key areas general counsel and their legal teams need to consider when it comes to pensions: tackling solvency issues around DB plans, keeping abreast of pension law reform, and helping their company derisk its pension obligations and mind its fiduciary duties. Facing the solvency crunch The biggest challenge organizations are grappling with is the growing deficits in their DB plans. At the end of 2011, 93 per cent of federally regulated DB plans were under-funded according to the Office of the Superintendent of Financial Institutions — a far cry from the early 1990s, when many ran surpluses. But that's only part of the story — most DB plans are provincially governed and face similar problems. It's not clear what the total liability is for underfunded DB plans in Canada. The Canadian Federation of Independent Business suggests public DB plans alone are $300-billion in deficit. Factor in billions more in red ink from private sector plans and the number starts to get very large, creating a ticking pension time bomb. Pension deficits are not isolated to Canada. An August 2012 study by credit rating agency Dominion Bond Rating Service Limited looked at 451 major corporate DB plans in the U.S. and Canada, including 65 north of the border. It found funding deficits of US$389 billion. DBRS noted more than two-thirds of plans were "underfunded by a significant margin" and heading into a "danger zone," the point at which reversing the deficit becomes difficult. It believes 80 per cent "is a reasonable funding threshold." The problem for organizations facing solvency deficits is they are required under pension law to make special funding payments to eliminate that shortfall over a tight time frame, in addition to making regular pension contributions. The money comes out of existing cash flow, which puts extra strain on balance sheets as the economy muddles along, and places companies at a disadvantage compared to competitors that do not have underfunded pension obligations. It's not just the private sector that's impacted. Public pensions face the same solvency pressures. Take the Ontario Teachers' Pension Plan, which pays out more than $4.5 billion a year to pensioners. It is considered one of the best, with more than $117-billion in assets under management, and invests around the world. In 2011, it returned 11.2 per cent, earning $11.7-billion, making it one of Canada's most profitable entities. Its rate of return since 1990 has been 10 per cent. Despite that performance, Teachers' had a funding deficit in 2012 of $9.6-billion and currently its expected pensions costs over the next 70 years are growing faster than the projected value of pension assets. Teachers' is not alone. OMERS, another big public plan, is expected to have a $9-billion deficit this year and many other public plans are in the same boat. In fact, Manuel Monteiro, a partner at pension consulting company Mercer's financial strategy group, estimates only one in 20 DB plans are fully funded on a solvency basis, which is a stress test pension regulators impose on plans. He said pension deficits are not a big deal for healthy companies. "If a plan is in a deficit position, the company is required to fund that deficit. It's not a big deal if the company you are working for is strong. If you work for a weak company that has a deficit you have to question if you will get a pension." Take Nortel, which sought creditor protection in 2009 — a deficit in the plan means pensioners receive reduced payments. Yves Desjardins-Siciliano, chief legal and corporate affairs officer at VIA Rail, which oversees a $1.7-billion DB pension plan that has a deficit, notes solvency is "an actuarial calculation and not an impending threat. It is an area that requires serious management attention, even at the board level." Like many companies, he says VIA is looking at ways to address its deficit. Low interest rates a problem Experts say the deficit problem is twofold. First, low interest rates are the biggest contributor. Plans simply can't keep up with the growing liabilities, because We hadBENNETT J. from a spark right the beginning. 1/4 page Your lawyer. Your law firm. Your business advisor. Untitled-4 1 w w w. c a n a d i a n law y er m a g . c o m / i n h o u s E april 13-02-26 10:25 AM 2013 • 23

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