Letter to Ontario Premier and MPs re the FSM alternative to pension wind-up

The following is the text of a letter from Don Sproule, chair of the NRPC, to Premier McGuinty and the Ontario legislators urging their action to put in place the FSM as an alternative to the current wind up by annuity approach that will reduce our pensions even further than the 35% shortfall in the pension trust fund. Please check the NRPC web site for more details on how you can help to get this message across.

To all Members of Provincial Parliament in the Legislative Assembly of Ontario
September 8, 2010

Please don’t wind up our pension plans!

I am writing to every Ontario MPP on behalf of the members of Nortel Retirees and former employees Protection Canada (NRPC) because of the financial disaster that is facing us after September 30. That is the day when Nortel’s pension plans will be placed in the hands of the Ontario government. Twenty thousand former employees across Canada will be permanently affected by the government's decisions, including a large number who are elderly and in poor health. Our pension plans represent our retirement savings and we should have a say in how they are managed. The time for some fresh thinking and action by the government on protection of pensions and pensioners is long overdue.

We discovered in 2009 that our pension plan is seriously under-funded. The latest information from Nortel indicates that we will lose at least 35% of our pensions. This estimate may prove highly optimistic for reasons described below. Given a choice in the matter, we would prefer that the assets of Nortel's estate were the means to reduce our losses, not the public purse. But the actions of the Federal government in favouring foreign claimants over Canadian workers in bankruptcy court make this unlikely. And now the Ontario government, having already allowed Nortel the opportunity to neglect its funding responsibilities, seems intent on making matters much worse for its retirees.

Over the past year we have purposefully and consistently asked the government NOT to wind up our $2.5 Billion Pension Fund and NOT to attempt to buy us annuities with the proceeds. The negative impact of Wind-up-by-Annuity is recognized in the 2008 report of the Ontario Expert Commission on Pensions* when it recommended that the government “investigate strategies for reducing the cost of annuities and the influence of the annuities market”. It is clear that Wind-up by- Annuity will erode even more of our pension incomes. Experienced actuaries and academics tell us that liquidating a very large fund like ours could cause a systemic failure of the Canadian annuity market, which typically can only supply between $200 Million and $500 Million worth of contracts per year. At best winding up our plan will cause a steep rise in annuity prices, which might lead to the purchase of lower quality products. Furthermore, outrageous as it may seem, we will be forced to pay the costs of this destructive process from our pension fund!

Wind-up-by-Annuity is not only punitive to retirees, but it also wastes public funds. In February 2010 many retirees were pleased to hear at last from Finance Minister Dwight Duncan that the government would honour the commitment of the Pension Benefit Guarantee Fund (PBGF). But since the PBGF’s obligation is based on the final size of each Nortel worker’s pension, Wind-up by- Annuity will also cost the Ontario taxpayer more money. The impact is not only in Ontario. Thousands of Nortel workers across Canada who did not have Ontario service are ineligible for the PBGF. They face the full pension cutback. So as a result of Wind-up-by-Annuity the Ontario taxpayer will fund higher PBGF contributions and in every other province, Canadian taxpayers will pay the burden of increased social security costs.

Fortunately there are more attractive alternatives to Wind-up-by-Annuity. The Ontario Expert Commission on Pensions recommended that the government create an Ontario Pension Agency (OPA) to keep stranded plans out of wind-up, thereby avoiding costly annuity purchase while also allowing them to benefit from improving economic conditions.

So in the spirit of Nortel’s era of innovation, we have a better idea for you: The Financial Sponsorship Model (FSM). The NPRC and its advisors took the premise of the Ontario Pension Agency to the financial markets and added some improvements. FSM also avoids buying costly annuities but unlike the OPA, FSM would guarantee a minimum income level that is no worse than Wind-up-by-Annuity while at the same time allowing pensioners to share in long term investment gains. FSM would ensure that PBGF guarantees for Ontario service are met, but at lower cost to the province. The NRPC and its advisers have canvassed strong Canadian financial institutions with the FSM concept and they believe it is a viable alternative. These institutions are currently dedicating major resources in preparation for a formal response. We now need the government to show the same level of innovation and creativity to help us get FSM over the goal line.

For Nortel pensioners across Canada, FSM provides for the continuation of more of their pensions without the unnecessary hardships caused by Wind-up-by-Annuity. For the Ontario government it offers savings on the PBGF and on social programs, without increased risk. But FSM has other benefits that could prove very significant in the longer term. For Ontario's financial institutions, it provides new opportunities to attract and manage capital. FSM will also be attractive to corporations that offer defined benefit pension plans because it removes unpredictable impacts on their cash flow caused by the need to fund Wind-up-by-Annuity obligations. In no small way FSM could help preserve the existence of defined benefit pensions in Canada. And Ontario would lead the way!

After September 30th, our pension plans will be on a course towards Wind-up-by Annuity. But if we start quickly we can chart a different and better course. Please give us your support in preventing further mistreatment of Nortel's pensioners. We have time for FSM to be put in place simply by amending the regulations associated with the Pension Benefits Act. We need action NOW!

Yours truly,

Don Sproule
NRPC, National Chair

*Recommendation 5-2, Arthurs Report on the Ontario Expert Commission on Pensions, 2008./attch. “An Alternative to Wind-up-by-Annuity for Nortel Pension Plans” NRPC, Sept. 7 2010