Sunday, September 5, 2010

Canadian Webinar 9-1-10 Summary Part 3

Part 3 of the summary of the webinar held by Koskie Minsky / NRPC on Sept 1st 2010.

(4) Defined pension Plan Update and Financial Sponsorship Model

Nortel will transfer administration of its pension plans to FSCO midnight Sept 30th 2010. FSCO will name an administrator as part of the standard wind up process per Ontario regulations.

The pension will continue to be paid as is for a few months until the administrator has officially determined the final wind up percentage ratio. The most current estimate (June 30th 2010) of the wind-up ratio was 64% for both managerial and negotiated pension plans and the estimate assumed indexed and non-indexed pensions. It is possible that the ratio will be lower that that when all the facts are fully known and calculated in a detailed manner.

When the final wind up ratio is known by the administrator, the pension will be reduced to that percentage, until the administrator completes the purchase of annuities to provide the pensions. This reduction in pension is often linked to the start of PBGF top ups in Ontario. The final wind up ratio can only be determined once assets and liabilities of the fund are completely known.

Each individual’s pension will be examined and worked by actuaries and advisors to ensure that everyone is fairly treated. The province (s) in which service was accrued or from which you retired will be important in the determination. In this standard wind up process, Quebec liabilities will be transferred to the Quebec Government for application of Law 1. This law will only apply to individuals who retired from Quebec. Ontario’s PBGF will apply only to the service accrued in Ontario.

People who are not entitled to an immediate pension will receive an option statement. They will be able to elect to receive a lump sum commuted value, or an annuitized pension. The commuted value amount can be transferred into a “locked-in” retirement account. Amounts in excess of the CRA limits must be taken in cash, and are subject to income tax. People who don’t receive an option statement will receive an annuity. People who are pension eligible on wind up can start the pension process with approval from the administrator and regulator.

The administrator will request proposals to secure group annuity contracts.

The full wind up of the pension can take a long time, possibly many years. Nortel’s pension situation is extremely complicated with individuals working in multiple provinces and transferred between jobs in various provinces and countries. Various provincial laws apply.

Financial Sponsorship Model

The NRPC are pursuing an alternative to the standard or current wind up process. The NRPC are referring to this approach as the Financial Sponsorship Model.

The Canadian Pension Benefit Act does not call for purchase of annuities on wind up. However, the current Ontario regulations do call for purchase of annuities, and in the FSCO FAQ’s on their web site it is clearly stated that annuities must be purchased on full wind up.

Because we are in very turbulent economic times purchasing annuities is not a good option since we will be subject to a number of very negative factors.

In Canada there are only about 6 companies that could take on the issuance of annuities for our pensions. The market is therefore constrained and is not very competitive. In addition the value of the pension fund at $2.5B will swamp the market which at present is closer to $500M annually. This will result in bids which we would not consider competitive. The interest rates for annuities are at a 20 year low so purchasing annuities at this time is a poor investment. Also the 64% funded ratio has built in annuity interest rates that are considered competitive so it is probable that that ratio will be negatively impacted. Finally, by buying annuities at this time, we will lock in the losses in the fund and never have an opportunity to recoup those losses that have occurred due to the market slump and the regulations that allowed Nortel to let the fund sink below a fully funded ratio.

It is important for us all to realize that pensions are really deferred compensation. If Nortel had not offered these pension benefits to us, we all would have sought out higher salaries and wages to build our own retirement fund. In addition because we were offered a defined pension benefit, the Canadian government limited our ability to place money into RRSPs. This inequity is being further applied by insisting that we lock in the losses and buy annuities. It is clearly a failing on the part of the government and should be addressed properly by our elected representatives rather than brushing us off as they seem to be doing.

Ontario had already convened a group to examine pension Reform, and in the recommendations section 5-2 of the Ontario Expert Commission on Pensions they said:
• Do not wind up the Plan.
• Establish an Ontario Pension Agency
• Avoid wind up by annuity.

Hence the NRPC are calling on the Ontario government to follow the recommendations of their own expert group and allow Nortel Pensioners to find an alternative to the annuity market. Since, in spite of the OECP recommendation, Ontario has not shown interest in forming a Pension Agency, the NRPC are asking that regulations be changed to allow a private company to take over and run the pension fund for us. This has been termed the Financial Sponsorship Model.

At this point the specifics o the FSM are not clear but the goals are to ensure that everyone continues with a pension that is better than what the standard wind up process would provide. It would be applied Canada wide and if properly managed it could result in improvement in the fund ratio.

The downside is that there is always some risk associated with investment, but on the other hand there is also some small risk of further pension reduction in the standard wind up process if the insurance company providing the annuity runs into trouble.

Before it is possible to define the elements and methodology of the FSM there is the question of having the Ontario regulations changed to permit such an approach. The NRPC are working towards that, with political engagement to convince Ontario to make the change.

As more details arise on this topic I will post the information.

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