In the 2012 Budget, the Federal government stated their commitment to introduce legislation which will require federally regulated employers to insure their Long Term Disability (LTD) plans. This change is part of a government initiative originally announced in the 2010 Federal Budget, to better protect workers when their employers go bankrupt, and will only affect federally regulated employers currently self-insuring their LTD plans. The timing of the proposed change is unknown.
Canadian plan sponsors can provide LTD coverage to employees either on an insured or a self-insured basis. Insured plans are provided through a contract with a regulated insurance company. Premium is paid in exchange for transferring risk from the employer to the insurer. Self-insured plans are generally administered by a third party, which is often an insurance company. Plans that are self-insured are not required to set up a Disabled Life Reserves, and, as such, it is common for LTD benefits to be funded out of current cash flow. These ‘pay-as-you-go’ plans rely on the plan sponsor’s ability to consistently generate adequate cash flow each month over the lifetime of the plan and for the duration of the benefit period for disabled employees. Herein lies the risk of this type of approach. In times of financial stress, it can be challenging for plan sponsors to continue to support their LTD commitments. Contrast this to an insured plan where, after a plan sponsor’s bankruptcy, the insurer continues benefits for disabilities that started while the group policy was in force.
Roughly nine out of ten employees with LTD benefits are covered under insured plans, which represent 82 per cent of actual coverage. (CLHIA Policy Paper, Protecting Canadians’ Long Term Disability Benefits, September 2010)
Private Member’s Bill
Interestingly, a Private Member’s Bill, the Protection of Beneficiaries of Long Term Disability Benefits Plans Act, was introduced into the legislature in March 2011 as part of an effort to protect disabled workers from company bankruptcies when the coverage is uninsured. The Bill, as is often the case with private members bills, did not become law. However, given the fate of disabled Nortel, Eatons, and Massey Combines workers, the issue did continue to be a source of discussion and concern, re-igniting the federal government’s promise in the 2012 Budget to introduce legislation on point.
From a public policy perspective, it makes sense for the government to intervene and ensure disabled employees are protected. Since it is possible this federal commitment will set a precedent for provincially regulated companies, all employers with self-insured LTD plans should strongly consider taking proactive measures. These employers should investigate the feasibility of insuring their plans and annuitizing these unfunded liabilities.