Ottawa explores pension backstop fund

OTTAWA and TORONTO -- Ottawa is floating the idea of creating a federal pension guarantee fund to plug shortfalls in the defined benefit retirement plans of companies that go bankrupt. Such guarantees are a hot topic right now because defined benefit pension plans are having a tough time amid choppy equity markets and low interest rates. The Department of Finance raised the idea yesterday in a consultation paper that asked Canadians whether Ottawa should make changes to the legislation and regulations covering federally regulated defined benefit pension plans. Finance officials haven't decided whether such a scheme would apply solely to federally registered plans, which account for only 10 per cent of Canadian pension plan assets, or would include provincially registered plans too. Mortgage Rates Compare national rates by lender: See Chart Officials cautioned they are not committing to introducing a pension guarantee fund, only to consulting on ideas such as that. John Gilfoyle, a senior investment consultant with Watson Wyatt in Vancouver, said the risk that Ottawa would need to avoid is that a federal backstop encourages companies managing defined benefit plans to take bigger chances. "There's potentially a tendency for an employer to say 'I am going to shoot the craps and go to Vegas on this and take much higher risks because there's always a stopgap that, if push comes to shove, the government will pick up the tab," he said. Other countries such as the United States have a pension benefit guarantee fund, but Ontario is the only jurisdiction in Canada with one, Finance said. Other ideas that Ottawa is exploring include giving companies more time to cover deficits in plans. "What types of conditions or rules should be required if greater funding flexibility is given to plan sponsors, to ensure that the risk to benefit security is minimized?" The defined benefit backstop issue arises in part because payments to steel workers at Algoma Steel Inc. and Ivaco Inc. threatened to wipe out the Ontario Pension Benefit Guarantee fund. The Ontario government had to bail out the fund last year with a loan of more than $300-million. The fund will be on the hook for more than $1.3-billion if Stelco's restructuring talks fail and the firm has to wind up its pension funds. Bankruptcies in the U.S. steel and airline industries throughout this decade and the 1990s left the U.S. federal pension insurance agency, the Pension Benefit Guaranty Corp., saddled with a deficit of more than $23-billion (U.S.).