Wednesday, August 16, 2017

Companies Breaking Their Pension Promise?

Sophia Harris of CBC News reports, Is your pension safe? It may depend on what happens to your company:
You diligently make contributions to your company pension plan with the assumption you'll get what you're entitled to when you part with your employer.

But that may not always be the case — depending on what type of plan you have and what happens to your company.

Currently, workers at both Sears Canada and Northstar Aerospace in Milton, Ont., are facing deep concerns about their pension prospects because of the problems plaguing their employers.

"This is not fair for us," says Naresh Ajmani, who retired from Northstar in 2015 after working for the manufacturer for 22 years, producing helicopter parts.

Ajmani recently learned from his union, Unifor, that because the Milton plant will soon be shut down due to lost business, his pension payments will likely be cut back.

"They have broken their promises," says Ajmani, who joined more than 100 Unifor members Thursday to stage a protest at the plant. "I have set up my retirement. I'm not getting what I'm supposed to get."

$6M shortfall?

Unifor claims that because the plant is shutting down in September, there will be an estimated $6-million shortfall in the employee pension plan, which Northstar is refusing to top up. As a result, the union says the 250 laid-off workers and retirees will face a potential 24 per cent reduction in their pension payments.

"To the workers that are going to lose a couple hundred dollars a month, it's significant. So someone's going to have to fix this," says Unifor national president Jerry Dias.

He also took part in the protest, which included blockading the plant's doors, preventing it from operating that day. "We had to take some dramatic action in order to get their attention."

Unifor may have received some attention, but it still faces an uphill battle for better pensions.

Northstar employees don't have a defined benefit pension where employers promise a certain level of payout to retirees.

Instead, they have a target benefit pension plan where, if there's a shortfall, the employer can choose to dole out reduced payments.

"We're not talking about any flagrant disregard for the collective agreement or breach of the labour relations act," says employment lawyer Muneeza Sheikh, with Levitt LLP in Toronto.

"What we have is a situation where Unifor is saying: what you're doing from a public accountability standpoint, from a moral standpoint, is extremely disrespectful and a slap in the face."

Northstar's parent company, Heligear, claims it's not responsible for any looming pension problems. The U.S. company says it made all the required payments, and that the plan was underfunded when it took over the Northstar plant in 2012.

"Any reduction or shortfall is a function of the plan management and design, which are not within Heligear's control," the company said in a statement.

Still, that's little comfort for retirees like Ajmani, who believes he will get a reduced pension. "Pension is a promise," he says.

It may be a promise, but sometimes, promises get to be broken. Sears Canada retirees also fear they may not get the pension they were promised.

Sears Canada pays 81 per cent

As part of a court-supervised restructuring process, the cash-strapped retailer is closing 54 stores and laying off 2,900 workers without severance.

Sears Canada has also requested court permission to stop topping up the underfunded retiree pension plan, though the retailer recently agreed to postpone that matter until Sept. 30.

Many of Sears' 16,000 retirees fear that if the company is allowed to stop making pension contributions, they will receive reduced pensions. Sears claims that may not necessarily be the case.

Recently laid-off employees who are collecting their pension in a lump-sum payout are facing another concern.

Sears Canada is only paying them 81 per cent of their pension value at this time; the remaining 19 per cent will be paid over five years, which is perfectly legal.

However, the missing money makes Kim Throop nervous. The former floor manager spent 24 years at the Sears store in Coburg, Ont., before it closed in March. She says she has already lost an estimated $16,000 in severance and now worries she may never see the rest of her defined benefit pension.

"There is some concern there, because you don't know what's going to happen in the next five years," says Throop. "If Sears goes down, will we see that 19 per cent?"

Employment lawyer Chantel Goldsmith says if the restructuring doesn't work and Sears goes bankrupt, chances are Throop won't get the rest of her pension. Retirees would become unsecured creditors who would have to line up behind secured creditors, like banks, to try to recoup that 19 per cent.

"If the secured creditors take all the money in the pool and there's nothing left for unsecured creditors, then, unfortunately, they'd be out of luck," says Goldsmith, with Samfiru Tumarkin LLP in Toronto.

Of course, Sears may successfully restructure and Throop may eventually get her full pension.

But the situation is another reminder that sometimes there are no guarantees that the pension you are promised on paper is what you will actually wind up with in retirement.
Over the last year, I've been reading quite a few articles like this one about Canadian and US companies breaking their pension promise. Unfortunately, it's only going to get worse as the pension storm cometh.

And whenever I read them, it makes my blood boil and only reinforces my fundamental belief that companies shouldn't be managing their employees' pensions, they should be focusing on their core business, that's it that's all.

Who should be managing the pensions of the few Canadian workers who still have a defined-benefit (DB) plan? A large, well-governed public pension plan like CPPIB which invests across global public and private markets or we can create a new public plan to manage these pensions as well as the pension needs of small and medium-sized businesses.

When I was working as a senior consultant/ economist at the Business Development Bank of Canada (BDC) back in 2008-2010, I peddled this idea to senior managers and it fell on deaf ears. I told them straight out, the BDC should provide pension solutions for small and medium-sized Canadian businesses and even create a pension plan that manages their pensions and the pensions of all Canadian workers with a company DB plan.

I was thinking big because in order to tackle this problem, you need to think big and have all pensions managed by a large, well-governed, public pension fund which is backstopped by the federal government.

In fact, and I have repeatedly stated this, I envision a future where all Canadian workers have their pension money managed by CPPIB and other large, well-governed public pensions.

In Canada, we're lucky, we have set the bar high in terms of pension governance, and that's why the future I envision will come to fruition one day.

Now, I recently discussed America's corporate pension disaster, where I stated this:
US corporate pensions use a market rate, not some assumed rate-of-return based on rosy investment assumptions. Some argue this is way too stringent while others argue it is far more realistic and if US public pensions used this methodology, their pension deficits would be far worse than they already are.

Lastly, following my comment on HOOPP's warning of a crisis, Bernard Morency, the former Executive VP of Depositors at la Caisse, sent me this:
On the issue below concerning corporations getting out of the pension business and letting Federal and States (provinces) handle it. As you know, I have been an advocate of a better C/QPP. However, don’t you think that, especially in the US, the States have proven that they are more unfunded and, perhaps, have botched pension math even more than corporations? So we would need to be especially careful if we were to ask them to do more.
Excellent point and let me clarify something, my recommendation is to have large, well-governed public pensions handle all the pension needs of a society. If they don't get the governance right, then state pensions shouldn't be managing corporate pensions. Period, end of discussion.

But clearly America has a public and private pension problem and it is only getting worse, leaving millions exposed to reduced pensions and pension poverty.

And make no mistake, America's pension crisis is a big part of the $400 trillion pension time bomb threatening the global economy and it is deflationary and bond friendly.
The point Bernard Morency made is excellent, but we don't have the same governance issues the US has with their state plans which are for the most part poorly governed because there is way too much government interference.

Having said this, someone sent me an email recently stating that many Californians are seriously contemplating to opt out of CalPERS and go it alone. This is a huge mistake, one they will end up deeply regretting down the road.

There is nothing, NOTHING, like a large, well-governed defined-benefit plan. Target benefit plans are not the solution, they're basically defined-contribution plans which incorporate some risk-sharing. They make perfect sense for companies but fall well short of the ideal pension plan.

Lastly, even well-governed pensions like HOOPP and OTPP have incorporated a shared-risk model where benefits are adjusted (typically cost-of-living) when the plans run into trouble. This makes perfect sense but don't confuse this with a target benefit plan.

Below, Sears Canada is going through a restructuring process, leaving retirees wondering what will remain of their pensions, and it could be a while before they find out. Amanda Ferguson with the details on defined benefit pension plans and their pitfalls.

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