Canada Post Task Force identifies pension deficit as key issue
In September 2016, the Canada Post Task Force issued its discussion paper, Canada Post in the Digital Age. The Task Force was set up in May 2016 by the Minister of Public Services, Judy Foote, to identify options to help put Canada Post on a sustainable long-term financial footing. Among other issues, the discussion paper identifies Canada Post’s pension deficit as a key issue that needs to be dealt with in order to achieve financial sustainability. The discussion paper was released in preparation for a public consultation and is one of many sources that will be used to shape the future of Canada Post.
The discussion paper summarizes the main challenges specifically faced by Canada Post, but the options and conclusions would be applicable to many defined benefit pension plan sponsors in both the public and private sectors who are struggling with the long term sustainability of their defined benefit pension plans. The conclusions could also be helpful to governments in their efforts to make defined benefit pension plan sponsorship more sustainable for employers.
Financial position of the Canada Post pension plan
At December 31, 2015, the Canada Post pension plan, one of the largest in the country with more than $20 billion in assets and liabilities, was in a slight surplus position on a going-concern basis but had a huge $5.9 billion solvency deficit1. The going concern funded ratio was 106% and the solvency funded ratio was 78%. The solvency position of the plan has deteriorated in recent years mainly because of declining interest rates, and continued deteriorating this year, as the solvency deficit is estimated to have increased to $8.1 billion as of June 30, 2016.
In 2011, the Government provided all Crown corporations with temporary relief from the need to make solvency special payments and allowed them to utilize a special kind of “letter of credit” (whereby the government basically acts as a bank to guarantee the amount of the letter of credit), but with a limit of 15% of plan liabilities. Solvency funding relief was extended for Canada Post for an additional four years in February 2014. However, this relief is now scheduled to end in 2018.
According to the Task Force, the defined benefit pension plan puts significant pressure on Canada Post’s financial situation. The solvency deficit may result in a significant need to increase borrowing requirements. The funding requirements tied to interest rate volatility put Canada Post at risk of being unable to sustain its business, including investing in capital assets.
Options available to Canada Post
The discussion paper summarizes the options available to Canada Post in the following table:
To illustrate the potential impact of certain options listed above, the Task Force estimated that Option 4 (i.e. excluding the value of indexing) could eliminate the solvency deficit completely, while Option 6 (i.e. adjusting the inflation assumption from 2% to 1.5%, for example) could reduce the solvency deficit by more than $1 billion.
Key points made by the Task Force are as follows:
- The elimination or further deferral of solvency funding requirements would be a significant benefit to Canada Post and of high effectiveness. The federal government’s consent would be required and it is possible that such a solvency exemption would be seen as a precedent for other crown corporations. It should be noted that some public service pension plans in Canada, including the federal Public Service Pension Plans (PSPP), are already exempt from solvency funding requirements, as the possibility of plan termination is considered quite low and the possibility of plan sponsor insolvency is non-existent.
- The Canada Post assets and liabilities could be reabsorbed into the federal PSPP from which it originated. This would be another way of providing a solvency funding exemption, given that the PSPP is not subject to solvency funding requirements. The Task Force notes that reverting assets and liabilities to the PSPP may be viewed unfavorably by the competitive marketplace, as it could be seen as an unfair competitive advantage for Canada Post. However, it also notes that the legacy of the PSPP design is a burden on Canada Post that private sector competitors do not have to bear.
- Subject to legislative changes, another alternative would be the conversion to a Shared Risk model. This would allow greater flexibility in funding and potentially adjusting benefit levels or ancillaries such as indexing. Within the Shared Risk framework, for example, Canada Post could continue to provide a guaranteed base pension to employees but only provide indexing conditional on investment performance. The prior federal government had proposed a target benefit model in April 2014 (see our Special Communiqué), but it is now unclear if and when the new government intends to consider such possible rule changes.
- The impact of changes to benefit design, including the introduction of a defined contribution pension plan, is minimal in the near term as design changes are generally limited to changes to future service accruals, thus not impacting the current solvency deficiency but limiting the growth of solvency deficiency in the long term.
The Canada Post Task Force seems to point to the elimination of solvency funding, either through legislative reform or through merger with the federal Public Service Pension Plan as one of the most effective options for putting Canada Post’s pension arrangements on a sustainable long term footing. We note that these options would not be an option for most private sector organizations in Canada at this time. The possibility of converting the plan to a shared risk model should be a viable alternative to consider at Canada Post and other public and private sector organizations wrestling with pension sustainability issues. This model could potentially provide a balanced sharing of risk between employers and employees, and could help manage both legacy costs and the cost of future benefits. However, legislative reform would be required in order to help make this model a reality. So far only New Brunswick, Alberta and British Columbia have taken significant steps in this regard.
The Task Force report represents Phase 1 of the Minister’s review; Phase 2 is a public consultation being held by a Parliamentary Committee in cross-country meetings between September 26 and October 7, while on-line comments may be submitted until October 21.
1 A solvency valuation is based on the estimated cost of providing the pensions should the pension plan be terminated, which is more expensive than running a pension plan on an ongoing, or “going-concern”, basis. A solvency valuation helps to protect plan members in case the employer were to become insolvent and thus leave members relying only on the plan’s assets to receive their promised pension benefits. Solvency deficits are normally funded over 5 years, while going-concern deficits are funded over 15 years.