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EVERYTHING YOU WANT TO KNOW ABOUT PENSION PLANS...

Every month you receive a payment covering your Bell pension. Have you ever wondered what backs up these payments, and what steps have been taken to make sure the payments keep coming?This article covers some of the basics of the Bell Canada defined benefit pension plan.

What is a “defined benefit” Pension Plan?

First, the term “defined benefit” is self-explanatory.What your pension payments will be is known to you before you retire.In fact, well before retirement you knew that the pension payment you would get is derived from a formula that uses your age, number of service years, and earnings.That is, the pension amount, which is the benefit, has been well defined.

Not all pensions are defined benefit (DB).For instance, Bell Canada no longer enrolls new employees into its DB plan.Rather, now they offer a “defined contribution”, or DC, plan.In this type of plan, both the employee and employer contribute money into a fund over time, and the money in the fund is then invested. In good times, the fund grows well.In bad times, the fund grows more slowly, or even contracts.Whatever is in the fund at retirement, that is what the pensioner gets.Contributions have been defined, the benefit has not.

Back to DB plans.For most employees, their pensions come entirely from the Bell Canada pension plan.For others, a portion of their pensions come from this same plan, and the rest comes from Bell Canada revenues.This article is only going to address that part of the pension payment that comes from the pension plan.

What is a Pension Plan?

The pension plan can be thought of as a large investment account.Bell Canada puts money into it when necessary, and money is taken out of it to pay pensioners their pensions.The amounts in the account are invested by the plan administrator, on behalf of and accountable to Bell Canada.In good times, the investments will grow; in bad times they grow slowly, or contract.Obviously Bell's objective is to have their investments placed where the amounts will grow, but also where the risks of losses is low.

The pension plan has to be big enough to cover all of its obligations.The chief obligation is the pension amounts that are owed to pensioners, now and into the future.Ideally, the pension plan would be so big that whatever investment returns it makes in a year are enough to pay all the pension payouts in that year.For instance, if there was $1000 in the pension fund, and it made a return of 5% in a year, then it would be considered “big enough” as long as it didn't have to pay out more than $50 in the year.

This example is far simpler than the arithmetic that the pension administrator really has to work with, but the pension plan operates on the same principle – though on a very much more complicated level we need not get into here.

How Do We Know if There is Enough Money in the Plan?

Bell knows whether the plan is “big enough” by looking at the plan's assets and it liability.Basically, the plan assets are the value of everything that is in the investment account, or can be expected to be in the investment account, at a particular time.The liability of the plan is the value of everything that should be in the investment account so that it is big enough to make all the pension payments that it has to make, now and into the future.To use the example above, if Bell knows that it needs to make a $50 payment every year, and it can expect to make a return of 5% a year, then it knows its pension plan must have at least $1000 in it.The liability of the plan in this case is $1000.

If the assets match the liability, then everything is fine because there the fund is big enough to meet all of the pension obligations.If the assets are greater than the liability, then there is said to be a “surplus”.That's good too, because there is more than enough money is the fund to meet its obligations.If the assets are less than the liability, then the pension plan is not big enough and there is said to be a “deficit”.The surplus and deficit are measured as the difference between the assets and the liability.

Who Decides How Much Money is Enough?

There are many rules that determine how the assets and the liability are to be calculated.For Bell Canada's plan, the rules are laid down in federal legislation, in regulations, and by the actuarial standards body, the Canadian Institute of Actuaries.It is federal legislation and regulation that is relevant to our pension plan because the Bell Canada plan falls under federal jurisdiction.Another article will discuss changes that are being contemplated for the rules, and how those changes could affect pensioners.

If assets match the liability, then that means the pension plan fund is just big enough to cover off its liability.Bell Canada as the sponsor of the fund only has to make sure that any changes in liabilities over the coming few years will be covered, and this may require them to make a payment into the fund, called the “annual service cost”.

If there is a surplus, then the liability is more than covered.In this case Bell need not make any payments into the fund, other than the amount by which the annual service cost exceeds the surplus.If the surplus is greater than the annual service cost, then Bell need make no contributions into the fund at all.This is called a “contribution holiday”.If Bell has to make a contribution because the annual service cost is bigger than the surplus, then it need only contribute the difference between the annual service cost and the surplus.This is called a “partial contribution holiday”.Even if Bell need not make a contribution to the fund, it is permitted to do so, so long as the total amount in the fund does not exceed the limit specified by the Income Tax Act.This is discussed in the next paragraph.

The Income Tax Act does not let a surplus grow any larger than 10% of the plan's liability.So, if the liability was $1000 and there was $1100 in the pension plan, because its investments performed so well or for some other reason, then Bell would have to stop its contributions to the plan.Whether this 10% cap should be increased, or removed altogether, is one of the rules that is being rethought.

Using the same example, let's assume a plan liability of $1000, and that assets are $1080.There is an $80 surplus.Who owns the $80?Does it belong to Bell, to the pension plan, to pensioners?This is a simple question, but the answer is neither unambiguous nor uncontentious.BPG has taken a stand on the issue, as have others.

Who Owns the Money in the Pension Plan?

Setting aside the question of any pension plan surplus, who owns the money in the pension plan?It belongs to the pension plan, and therefore to the beneficiaries of the pension plan – i.e. the pensioners. It does not belong to the plan sponsor, Bell.That is why when Bell reports its assets and liabilities, it does not include the pension plan assets nor the pension plan liability.

What Happens When There is a Deficit?

What happens when there is a deficit, i.e. when the plan liability is greater than its assets?The answer is that the difference has to be made up by Bell, the plan sponsor, because for a pension plan of type provided by Bell, the sponsor is responsible for making sure the pension plan has enough resources in it to meet all of its pension obligations.Bell does this by making contributions over a specified period of time that are big enough to make up the deficit.These contributions are called “special payments” in the language of the federal legislation that sets down the rules. Because they are paid over time in installments, they are said to be payments towards the amortization of the deficit, much the way a homeowner pays down his mortgage.The period of time over which the payments are made is called the “deficit amortization period”.

How Long does it Take to Pay for a Deficit?

How long is the deficit amortization period?Another simple question, with a complicated answer.The fact is there are two different ways to calculate the plan liability.One way of doing it assumes that the sponsor will operate indefinitely. The liability associated with that scenario is called the “ongoing liability”.

The other way of calculating the plan liability is to determine the amount that must be in the pension fund so that it would be capable of meeting all the pension obligations even if the sponsor were to cease business.Because this calculation simulates that the sponsor is insolvent, and would therefore have to wind-up the plan, it is called a “solvency liability”.In this scenario, each plan member is supposed to receive an amount that will match the value of what he/she would have received from the pension plan had it kept going.

Each type of plan liability calculation is performed, and compared to its assets.The plan deficit is the larger of the ongoing deficit and the solvency deficit.If the larger of the deficits is the ongoing deficit, then the sponsor has 15 years to make it up through special payments.If the larger of the deficits is the solvency deficit, then the sponsor has 5 years to make it up, according to the current regulations. However, fairly recently temporary regulations have allowed sponsors to take 10 years to make up the solvency deficit, rather than 5, as long as they meet certain conditions.Whether the amortization period should be extended to 10 years permanently, and whether conditions should apply, are otherrules that are being rethought.

Who Sets the Rules?

Bell, as a DB pension plan sponsor, has to show it is complying with the legislation and regulations.It does this by filing with the regulator certain information about the pension plan, including its ongoing and solvency liabilities, assets, whether there is a deficit or a surplus, what type of deficit if there is one, and what steps in terms of special payments it will take to amortize any deficit it may have.These reports must be filed at least every three years.If there is a deficit, and as long as there is a deficit, reports are filed annually.Once there is a surplus, reporting need only be done every three years.The frequency of filing these reports is also being rethought.There appears to be a consensus building that annual filings should be required whether there is a deficit or a surplus.It is expected that the filing requirements will be changed soon to reflect this consensus.

The regulator is the Office of the Superintendent of Financial Institutions (OSFI).OSFI does not write the legislation governing pensions, rather its mandate is to ensure compliance with pension related legislation that comes from Parliament, and to institute and enforce regulations consistent with that legislation.

What is the Situation of Bell’s Pension Plan?

So far this article has been using hypothetical figures to illustrate the concepts.Bell Canada's pension plan is quite large, because it has over thirty thousand DB retirees to support.The last time Bell filed a report with OSFI was at the end of 2007.At that time its solvency liability was $11.891B, its ongoing liability was $11.209B, and its assets were $11.908B. Consequently, Bell's plan had a surplus: $77M on a solvency basis, $699M on an ongoing basis.

Bell's annual service costs in 2009 are estimated to be $200M. Financial markets have been unkind to investment portfolios in 2008.Bell has not filed a study of its pension plan for 2008'however its Annual Report for 2008 indicated that its pension plan fund had a return of -19.5% in that year.Though this is clearly apoor return, it is in line with the returns of most large investment funds for that year.

Not surprisingly, with such a sharp decline of plan assets, the Bell pension fund, as of the end of 2008, is estimated by Bell to have had a solvency deficit of about $1.8B, and on ongoing deficit of about one billion dollars.Bell's 2008 Annual Report also indicated an expectation that contributions of $170M would be made in 2009 towards the plan's solvency deficit, based on a ten year amortization period. Though Bell need not commit to this level of special payments until the end of the year, it is expected that payments of this magnitude will be made for 2009.



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