10 November 2005
Dodge Calls for Reform of Pension Rules
Canada's troubled pension system needs to be reformed to encourage more risk-taking and
include better incentives for company plans to accumulate surpluses, Bank of Canada Governor David Dodge said yesterday.
Defined-benefit pension plans, in particular, need a new structure to make sure they are viable, Mr. Dodge said in a
speech to business students in Montreal.
"If defined-benefit plans are to survive, grow, and provide a source of funding for long-term, riskier
assets, it is important that Canadian policy makers consider taking steps to rebalance the incentives for sponsors to operate
defined-benefit plans", he argued.
The majority of corporate pension plans are defined-benefit plans, which give employees a guaranteed pension based on
years of service and wage levels. Their deficits have ballooned in the past few years due to low equity returns and
rock-bottom interest rates, and retirement benefits are now at risk.
Several corporate executives at companies with defined-benefit pension plans applauded Mr. Dodge's calls for reform.
"I think he's right on", said Michael Waites, chief financial officer Canadian Pacific Railway Ltd. of Calgary. CPR reported
a pension deficit of $604-million at the end of 2004. Mr. Waites and others said under current rules, companies have
little incentive to run a surplus in their pension funds because there is a lack of clarity on who owns or controls those
funds.
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