By Chris Kincaid
PENSION: I’m not dead!
UNION: He says he’s not dead!
COMPANY: Yes, he is.
PENSION: I’m not!
UNION: He isn’t.
COMPANY: Well, he will be soon; he’s very ill.
PENSION: I’m getting better!
COMPANY: No, you’re not—-you’ll be stone dead in a moment.
(With apologies to Monty Python)
What can people do to ensure a decent retirement? A good workplace pension is a smart place to start. But the common line employers are giving these days is that what’s good for the company is good for the workforce—-even if that includes cutting employees’ pensions. But workers shouldn’t take these arguments lying down.
When the Canadian media bothers to talk about pensions, plans are described as “deteriorating,” “underfunded,” “in the red,” “failing,” and other terrible things. We are told that pensions are on their deathbeds. A recent article in the Edmonton Journal, for example, stated that underfunding of pensions is “creating a crisis today that threatens the existence of defined-benefit plans.”
Ballooning pension costs are accused of killing the competitiveness of Canadian companies, driving otherwise profitable outfits towards bankruptcy. Nortel, for instance, announced earlier this year it will cut $100 million from its labour costs by freezing its pension plan and replacing it with a savings plan (retirees will keep what pension benefits they have, but current employees will not see their defined benefit plans grow even if they continue working).
Nortel joins a long list of North American companies who are ditching their workers’ defined benefit plans: GM, IBM, Motorola, Hewett Packard, Alcan, Lucent Technologies, Verizon Communications, and others. Two of Canadaï¿½s highest profile bankruptcy protection cases over the last couple of years—-Air Canada and Stelco—-featured massively underfunded pensions. Importantly, however, workers at Stelco resisted the pressures to walk away from their pension, and after nearly two years in the courts, succeeded in keeping their pensions intact. So what do workers need to know about the pension “crisis” and how to resist the calls to give up on pensions?
Anatomy of a manufactured crisis
It takes resources, mostly financial, to ensure retirement incomes. A number of factors are pushing these costs up: people are generally living longer, medical and drug expenses are increasing, and the baby boom bulge is approaching retirement age.
An overriding goal of both working people and the labour movement is to ensure that retirement incomes are sufficient and stable. No one wants to spend their old age in poverty or insecurity. Any consideration of workplace pensions needs to be put in this bigger picture.
But for employers, the consideration is necessarily more focused. Employers do not inherently share the worker’s goal of long term retirement income security, nor does such security, in itself, improve the bottom line. The only real concern employers bring to the issue is how much pensions cost. Maintaining pensions is a priority for employers only to the extent that workers make it one.
In other words, employers have little interest in the continued existence of workplace pensions. Yet it is their perspective that dominates the current discussion of whether pensions are in “crisis.”
To employers, pension funding costs can appear disconnected from other costs. Most importantly, they are hard to control. The more an employer is bent on maximizing operational efficiency, the bigger a problem this is. Most costs rise or fall in relation to business decisions – to produce more or less, to focus on one product or service relative to another, to shop around for better supply deals, etc. Not pensions. Interest rate and life expectancy assumptions are the primary influences over how much cash needs to be put into the pension plan in any given year, and employers do not get to control these assumptions. This makes pension contributions a pesky variable. These days, pensions also happen to be an expensive variable. It is this desire for control, and drive to improve efficiency, that is behind this talk of a pension “crisis.”
Most employer pension plans across Canada are in deficit. But is the sky really falling? Studies from groups such as the Certified General Accountants Association of Canada have found that in Canada a majority of traditional workplace pensions, called “defined benefit” plans, are underfunded, and those underfunded plans are short by a fairly significant amount (these plans were found to have, on average, only 74 cents of assets for every dollar of future obligations). The estimated total shortfall in these workplace pension plans at the end of 2003 was nearly $200 billion, and things have not improved since. Sounds scary. But what exactly does it mean for a pension plan to have a deficit?
To understand the facts behind the hype, it is necessary to consider what a traditional workplace pension consists of. Typically, it must be able to deliver on two important promises to employees. First, the pension is a promise of a fixed monthly income (usually a set dollar amount, or a percentage of average earnings, adjusted upwards for every year the employee worked for the company). Second, the pension is a promise to pay this retirement income for life, and usually for the retiree’s spouse’s life as well. For workers, this is how the pension delivers not just income, but secure income. The retiree and their spouse will have a known amount coming in every month for the rest of their lives. For employers, however, these promises come with financial risk, which is what makes pension plan funding less appealing.
Pension regulatory schemes force employers to put cash aside up front, in order to ensure resources are there to deliver on the pension promises. Essential to this scheme is the question of how much really needs to be put aside today. Actuaries have basic standards by which they estimate the total of all payouts promised by the pension to workers and retirees. They then factor in interest rates, because these payments are due in the future, not now. In other words, they assume money put aside today will earn something in the market before it actually needs to be paid out to any retiree. The employer is allowed to rely on these assumed investment earnings. Comparing calculations of anticipated need with the pension plan’s actual investments determines whether the plan is on track or not. If actual investments exceed their calculated figure, there is a surplus. If not, there is a deficit. These days, plans tend to have a deficit.
Is a deficit a reason to panic? Not necessarily. Have you ever had all the money you’ll ever need in the future on hand now? Probably not. The issue is whether you can reasonably expect to come up with the difference. The same goes for pensions.
Pension regulators agree with this approach. Nicholas Le Pan, outgoing superintendent of Financial Institutions Canada, Canada’s federal pension regulator, states the case clearly in these remarks at a consulting firm seminar in Toronto in 2004: “Plans are allowed to run at a deficit for good reason. All deficits are not cause for concern. What matters is the ability to fund the deficit.” In other words, not having everything in your pocket today is not necessarily a problem. You just have to fill up that pocket before the time comes.
But if an employer doesn’t want to have to ante up, then they may want to call this deficit a “crisis.”
Pension plans are not always in a deficit position. Right now, many are, due to a mix of particular and constantly changing factors. Chief among these are low interest rate assumptions. When actuaries assume low interest rates, employers get less credit for assumed future market returns. This means more real cash today has to go into the pension. A decade ago, stellar equity markets meant the opposite was true. So much so that some pension plans were until recently effectively free for employers, as the high performing investments were growing faster than the workforce was aging.
Many employers have short-term memories and short-term horizons. If an employer’s goal is to get out of pension obligations entirely, then they will have little interest in ensuring the pension’s long-term stability. On the contrary, short-term cost run-ups provide aggressive employers with just the “proof” they need to show workers why the pension needs to go.
When interest rates fluctuate, the amount of cash required for the pension fluctuates. For lean, efficiency-oriented employers, this can cause serious headaches. Even if there is no reason to fear for the long-term health of a plan, few employers like seeing this year’s pension contributions spike if it creates a cash squeeze on other parts of their operations. Employers prefer to have more control over their cost structure, and pensions funding can appear too variable and too sensitive to external factors.
This is the real issue behind the “crisis:” short-term cash flow convenience, not long-term pension plan viability. Cutting a pension, in part or in whole, would reduce an employer’s likelihood of cash-flow headaches. It’s not surprising, then, how many employers are pushing this notion that pensions are in “crisis,” as if their demise is inevitable, and not just an employer preference. For the labour movement, the “crisis” is the extent to which people sympathize with employers and allow their pensions to be reduced or taken from them. Pension funding may be inconvenient, but it is not impossible.
Responses to the “crisis”
There are all kinds of proposed policy responses to the “crisis.” The labour movement tends to prioritize security and recognize that deficits are only a concrete problem if a workplace shuts down or goes bankrupt. Accordingly, the labour movement is pushing for pension benefit protection. One main goal is the establishment of a general pension insurance scheme backed by government (called a Pension Benefit Guarantee Fund), that would charge pension plans an insurance premium, and then bail them out if they failed. A plan like this currently exists in Ontario, but it should be extended across the country. A second legislative initiative would put workers first on the list of who gets paid what they are owed in a bankruptcy situation. Both of these responses would increase security, even in the face of a deficit situation.
Employer groups tend to disagree, and look instead to improving “affordability.” This is a euphemism for being cheap. The actual proposals would simply make pensions cost less by sacrificing security for retirees. A recent editorial in Canadian Business magazine typifies this approach, stating that “if we can make pensions an attractive proposition from a Chief Financial Officer’s perspective, then the employees’ pension crises may well solve themselves.” This pushes in exactly the opposite direction of the labour movementï¿½s position. The editorial frowns on the idea of pension insurance, saying it is a “moral hazard” that would create a license for employers to be reckless with their pension funding. That’s like suggesting medical insurance is a hazard because it is a license to go hurt yourself. Insurance reduces risk by sharing it. It doesn’t create rewards for reckless behaviour.
The editorial also argues against increasing pension protection in bankruptcy situations as it might step on the toes of the more powerful banks and lenders—-as if our profitable banks need incentives more than retirees need pensions.
According to employers, the best policy solutions are those that would improve cash flow. For example, the same editorial supports a new federal government policy proposal to allow employers to take twice as long (ten years instead of five) to cover any deficit. That would do nothing to improve the financial health of pension plans, but it would leave employers freer to spend on something other than their pension.
The other policy solution pushed in the Canadian Business editorial is to allow employers to skim off any investment return surpluses from pension plan investments, and put them back into the employer’s bank account. Employers, it seems, want it both ways. When contributing to the pension plan, they consider it a labour cost. Workers asking for wage increases hear how much the company is already spending on the pension. But if pension’s investments perform well, then suddenly the excess was not a labour cost, but an investment they were making for themselves.
Such employers have their sympathizers, as one might expect. Authorities such as David Dodge, Governor of the Bank of Canada, support the idea that pension plansï¿½ surpluses ought to be rolled into employer cash flow. He also thinks additional tax breaks for employers would help. He frames the “crisis” as one of efficiency, not income security, and sees the solution in these enhanced “incentives for [employers].”
Pensions and the labour movement
For the labour movement, there are two separate conversations underway in any discussion of pensions. The first has to do with meeting workers’ needs after they’ve retired. The second has to do with an employer’s overall operational efficiency and cash flow. A goal of the labour movement is to make sure these two types of questions do not collapse into each other.
If they do, then the pension “crisis” will be solved on employer terms. Rather than prioritizing security, workers may agree to reduce the risk for their employers by agreeing to “painful-but-(apparently)-necessary”—- pension cuts. Or workers may agree to take on the risk themselves, by switching from traditional “defined benefit” pension plans to RRSP-type pensions. Either way, if employers succeed in convincing workers that their needs are one and the same, the only solution to the “crisis” will be to compromise workers’ own expectations around retirement income security.
Why would a shift to an RRSP-based pension scheme constitute a compromise? Such plans are inferior to traditional “defined benefit” pension plans because two essential promises are lacking: there is no guarantee of a fixed monthly amount, nor that the pension will last for the life of the individual. RRSPs are simply savings accounts with tax-deferral incentives attached. They are a pot of savings from which retirees can withdraw funds as needed. However, once the pot gets used up, itï¿½s gone. In other words, they provide income, but not the same kind of security as the traditional workplace pension plans.
Employers prefer RRSP-type pensions because they are able to say they are providing a pension to their workers, but they take on none of the risks associated with a traditional plan. The employer usually contributes a percentage of earnings—-and nothing else. In other words, the costs are controlled, and do not vary due to any external factors.
RRSP-type plans are clearly better than no retirement incomes at all. But as a solution to the pension “crisis,” they serve employersï¿½ interests above all.
Through unions, workers can fight to protect their pension plans, or to improve upon what they already have. On their own, workers have very little power to challenge an employer’s attempts to reduce all workplace issues to operational efficiency issues. They have little power to insist that their own retirement income security should take precedence over maximizing profit.
Of course, not all workers have traditional benefit plans—-far from it. Not all workers even have RRSP-type plans, or even RRSPs alone. Coverage is far from consistent, and workplaces are changing faster than pension plans. Increased immigration and mobility, changing family dynamics, careers with multiple employers, and the rise of longer-term contingent employment are only a few of the factors creating new challenges to ensuring retirement income security for workers. Meanwhile, employers are trying harder and harder to back away from pension obligations, and are encouraging workers to prioritize competitiveness.
All of these changes point to how the labour movement’s job is getting tougher. But at the same time, they offer both rationales and opportunities for workers to continue to work together to protect their individual and common interests.
Chris Kincaid lives in Toronto and works as a staff representative in collective bargaining and research.
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