REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive Summary

Issue

The Canadian Press is unable to make the special pension payments it owes to its two defined benefit pension plans under the current minimum funding requirements for federally regulated pension plans as set out in the 1985 Pension Benefits Standards Regulations. Furthermore, the proposed Solvency Funding Relief Regulations, as published in the Canada Gazette on April 4, 2009, would not provide sufficient funding relief to permit the continued operations of the Canadian Press. Absent special funding relief from its pension obligations, the pension plans of the Canadian Press may be terminated in a significantly underfunded position. If this were to occur, potential pension plan members’ claims against the company could force it to cease operations.

Description

Under the Pension Benefits Standards Act, 1985 (the “Act”), the federal government regulates private pension plans covering areas of employment under federal jurisdiction, such as telecommunication, banking and inter-provincial transportation. The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of such plans. OSFI supervises some 1 350 pension plans or about 7% of all pension plans in Canada, representing about 12% of trusteed pension fund assets in Canada; 446 of the federal plans are defined benefit pension plans. A defined benefit pension plan provides a pre-determined monthly retirement benefit to an employee based on the employee’s earnings history, years of service and age. The two defined benefit pension plans of the Canadian Press, The Pension Plan of the Canadian Press and The Canadian Press Pension Plan for Employees Represented by The Canadian Media Guild, are subject to the Act.

The Act requires that federally registered pension plans fund promised benefits in accordance with standards set out in the Pension Benefits Standards Regulations, 1985 (1985 Regulations). Defined benefit pension plans must file actuarial valuations every three years, or more frequently as required by the Superintendent of Financial Institutions (the “Superintendent”). Where these valuations show a pension plan’s assets to be less than its liabilities, special payments must be made into the plan to eliminate the deficiency over a prescribed period of time, as described below. One of the main purposes of regulation is to set out standards for funding and investment of pension plans to ensure that the rights and interests of pension plan members, retirees and other beneficiaries are protected. In particular, regulation is intended to ensure that pension plan assets are sufficient to meet pension plan obligations.

Actuarial valuations of defined benefit plans are conducted using two different sets of actuarial assumptions: “solvency valuations” use assumptions consistent with a plan being terminated, while “going-concern valuations” are based on the plan continuing in operation. If a solvency valuation reveals a shortfall of plan assets to plan liabilities, the 1985 Regulations require the plan sponsor to make special payments into the plan sufficient to eliminate the deficiency over five years. Where a deficiency exists on the basis of a going-concern valuation, the 1985 Regulations require special payments to eliminate the going-concern deficiency over 15 years. In general, the payments that a plan sponsor must remit to a plan in a given year include the amount necessary to cover the ongoing current service costs associated with the plan, plus any “special payments” required in that year to pay down a funding deficiency over the relevant time period.

The Canadian Press Pension Plans Solvency Deficiency Funding Regulations (hereinafter, the Regulations) apply to the two defined benefit pension plans (there is one plan for non-unionized members and another for unionized members) sponsored by the Canadian Press. The Regulations, which were developed in close collaboration with the company, are intended to provide flexibility to the Canadian Press with respect to its pension obligations while it effects a restructuring plan. The company is a not-for-profit corporation that is owned by its members and operates pursuant to a 1923 Act of Parliament. It is funded through subscriptions to its services, which include wireless news services in both English and French, and photographic services, among others. Due to its corporate structure, the company faces a unique situation in that it does not have the capability draw on reserves, reduce profits, issue shares or seek credit to deal with its increased costs.

The company is planning to restructure itself along the lines of a for-profit corporation, with share capital. The company has stated that the immediate funding requirements of its pension plans impair its ability to find investors for the restructured enterprise. To facilitate this restructuring, the Regulations provide immediate funding relief, subject to the consent of plan members and beneficiaries (detailed below).

Under the Regulations, the Canadian Press will be permitted to remit the unpaid amounts from the payments due in respect of the normal cost and any special payments accrued over the plan year ended December 31, 2008, over equal monthly payments until December 31, 2009. The deferred amounts will be subject to a deemed trust, such that the amounts due, but not remitted, are deemed to be held in trust and do not form part of the company’s estate under bankruptcy provisions.

The Regulations provide that no special payments are required to be remitted during the period until the end of October 2010. The deferred amounts will be payable in aggregate at the end of this period. For the Canadian Press to avail itself of this form of funding relief, member and beneficiary consent, as outlined below, must be obtained. The amounts deferred under this provision are subject to a deemed trust.

Member and beneficiary consent is an important element of the Regulations. The consent provisions provide that no more than one third of active plan members and one third of beneficiaries — as separate groups — object to the funding relief outlined in the Regulations. Active members are employees of the organization who have been enrolled in one or both of the plans, while beneficiaries include retired members, deferred vested members and other beneficiaries, including surviving spouses and other named beneficiaries of plan members.

The Canadian Press has already met the consent provisions of the proposed Regulations, and has confirmed the consent of plan members and beneficiaries.

No plan amendments that would have the effect of granting benefit improvements shall be implemented during the period in which the Regulations are in force.

The Regulations restrict the ability of the plans to pay subsidized early retirement benefits. To help effect the restructuring, the company intends to offer a voluntary early retirement program to eligible employees, and has agreed that any retirements that plan administrators consent to will not decrease either plan’s solvency ratio by more than 10%. The ability of the company to offer subsidized early retirement benefits is also subject to member and beneficiary consent, in the same manner as the special payment deferral outlined above.

In addition to the deemed trust that applies for amounts deferred under the Regulations, where the Canadian Press obtains secured borrowing in excess of a $5 million threshold, the terms of that secured borrowing must state that the amount is subordinate to all amounts that are considered to form part of the deemed trust under the Regulations.

Regulatory and non-regulatory options considered

The Canadian Press’s pension obligations are placing significant stress on its ability to continue operations. The company has indicated that it is not viable without solvency funding relief, and would have to file for bankruptcy protection if it were made to fund according to existing pension rules. The company could choose to terminate the pension plans in an under-funded position, or apply to the Superintendent for a reduction in accrued benefits. In either of these alternatives, however, plan members and retirees would face a significant reduction in benefits. As such, either of these approaches may not necessarily be in the interests of plan members and beneficiaries. Furthermore, termination of the pension plans in an underfunded position could lead to claims by beneficiaries against the company, which could result in the company’s bankruptcy.

The purpose of the Regulations is to provide the Canadian Press with funding flexibility to successfully effect a corporate restructuring while protecting members and beneficiaries to the greatest extent possible.

Analysis

The Canadian Press could be forced into bankruptcy protection if it funds its pension plans under current requirements. The company believes that its best potential for survival as a going concern, and to protect member and retiree benefits to the greatest extent possible, is to fund its pension plans according to the provisions of the Regulations.

The alternative of terminating its pension plans or reducing accrued benefits will result in members and beneficiaries facing a reduction in benefits. Some members and retirees may believe that their interests are better protected with an immediate reduction in benefits versus the uncertainty associated with the temporary suspension of special payments and uncertain future of the company. As such, these individuals were offered the opportunity to object to the approach outlined in the Regulations. However, member and beneficiary support for the Regulations has been achieved, with fewer than 1% of the plans’ 542 members, retirees and other beneficiaries registering objections within a period of at least 30 days following receipt of disclosure documents.

An assessment under the strategic environmental assessment policy has been conducted and concluded that there are no important environmental effects.

Benefits and costs

Benefits

The Canadian Press makes an important contribution to the diversity and accessibility of news in Canada. The Regulations will result in the deferral of special pension payments totalling approximately $14.1 million, which will facilitate the ongoing operations of the Canadian Press and permit it time to effect a restructuring.

The Regulations protect member and beneficiary interests to the greatest extent possible — recognizing that in this situation, the best protection for these parties is allowing them to make an informed choice. In doing so, they have opted to assume more risk in the short term with a view to supporting the continuation of the sponsor’s business operations over the longer term.

Costs

No additional costs are anticipated for the Office of the Superintendent of Financial Institutions to administer the Regulations as the existing supervisory regime provides the necessary information and oversight to implement them.

There will be no direct cost to members and retirees of the pension plans. However, the plan beneficiaries will be subject to increased risk associated with a solvency deficiency that is likely to increase in the short term and that may persist over a longer period.

Consultation

The Regulations were developed based on discussions with representatives from the Canadian Press and the Board of Trustees, with support in principle expressed by the Canadian Media Guild. All parties are supportive of the approach outlined in the Regulations.

The Canadian Press has fulfilled its obligations under the disclosure and consent provisions of the Regulations. The disclosure provided by the company was reviewed by both the Department of Finance and the Office of the Superintendent of Financial Institutions. The Canadian Press has certified that the results of the procedures indicated consent by both plan members and retirees and other beneficiaries.

Implementation, enforcement and service standards

The Regulations will not require any significant change in OSFI procedures or significant additional personnel resources.

The provision of the Regulations that permits the Canadian Press to not make special payments alters somewhat the regulatory tools at OSFI’s disposal for the plans subject to the Regulations. In particular, many actions that could normally be taken by the regulator to protect the security of benefits involve enforcing the remittance of required payments. Nevertheless, OSFI will monitor the financial position of these pension plans closely and their compliance with applicable regulatory requirements.

Contact

Diane Lafleur
Director
Financial Sector Division
Finance Canada
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-5885
Fax: 613-943-8436
Email: Diane.Lafleur@fin.gc.ca