Much is being said about Canada’s crushing public sector pension debt, now estimated to be more than $300 billion, but few Canadians realize the potential additional cost to taxpayers of the collapse of the remaining private sector defined - as in guaranteed - benefit (DB) plans.
Union leaders and left-leaning politicians and media constantly suggest higher corporate taxes to address government debt and deficits, most of which has been brought about by excessive compensation and pension packages. Some larger companies are already treading water and shifting profits to fund their own broken pension promises. These massive transfers of assets are limiting investment in research and development, growth and new asset purchases and will limit the competitiveness of Canadian industry for a generation to come.
Currently there are several disputes across the country regarding pensions for workers in defined benefit pension plans. Labour unions have dug in their heels saying that the will not stand for changes to their pensions. Fortunately for some of them - but not for taxpayers - governments have been willing to spend tax dollars to preserve these benefits for the fortunate few. In 2009 for example General Motors, facing bankruptcy partly because of a $6-billion pension deficit, was bailed out by taxpayers to the tune of $474,000 for each job saved.
At Canadian Pacific (CP) there is a current labour dispute based on company changes to the pension plan and Air Canada seems to be in continuous multi-year negotiation over theirs. Canada Post is in intensive care and if it was a private sector corporation it would be bankrupt because of its pension shortfall.
Canadian taxpayers should be infuriated that these issues are allowed to fester without politicians initiating the reform that is desperately needed. The only steps they seem to be prepared to take is to give an infusion of more taxpayer money when things become desperate and pensions need a bailout.
In the CP dispute the company has imposed two options on the union. The first is the elimination of the defined benefit pension going forward, with new employees enrolled on a defined contribution plan; the second is a cap on yearly benefits in the current defined benefit plan of $60,000. How many employees are earning pensions in excess of $60,000 that this is considered a problem?
It seems to be a little bit over the top for most Canadians especially the 60% over age 65 who have no pension and disposable income of less than $21,500 a year.
Closing DB plans to new employees is a dilemma
Pension plans that can’t achieve the required investment returns (which is pretty much every DB plan in the country over the past 5 years) rely on the increased contributions from new hires to cover shortfalls. New hires typically pay a far greater percentage of income than employees have in the past. In essence current employees have to fund shortfalls for retired employees and wonder if the money will be there when they retire.
This as stated by California Governor Jerry Brown, makes it a ponzi plan. When the new employees are diverted into a DC plan the contributions to the DB pension are cut off and the ponzi accelerates in speed.
The stock markets have not been kind to pensions in the past few years as the current S&P/TSX return is now down 5% in 2012, down 15% over one year and 19% over 5 years. On the other hand most pensions are based on estimated salary increases of 4.5% per year and counting on the markets providing 6% to 7% return. Now not only does the plan have to make up the 5 year 19% loss but another estimated 35% to 40% return on the markets.
When the market returns are not sufficient and the employee contributions are not enough the plan plunges into deficit. Over the past three years the CP has pumped $1.9 billion into the pension plan to provide those workers with pensions in excess of $60,000 a year at retirement. There is a huge cost to society of this money funneling into the pension savings account of employees. It is money that is diverted away from investors of the company. Reducing profits to pay pensions impacts anyone who hold CP shares in their RRSP, either directly or though mutual funds and is counting on returns for their own retirement.
Another similar pension basket case is Air Canada, now really a pension fund operating an airline for the benefit of its retirees and employees. Consider that the market value of Air Canada is a little over $225 million, that it has a $10 billion pension plan, and this year saw its pension shortfall rise to over $4 billion. In 2011 it had an operating profit of $179 million. The company would need to invest all its profits for the next 22 years just to fund the pension shortfall. Certainly no new planes or other capital investments can be expected for many years. Not good for Canada in a competitive and globalized marketplace.
Canada Post is in crisis with a pension shortfall of $4.8 billion up by $1.5 billion from the year before. You should be expecting a bill in the mail shortly to bail out their pension plan. With 59,810 active employees in the plan this works out to a future bailout of $80,000 per employee. Canada Post is now like a house with a mortgage bigger than its value, with negative equity of $1.7 billion.
Unfortunately no national initiatives on the pension crisis can be expected anytime soon. Elected officials hate to upset the largest political group in the country, unions. Unions fund hundreds of millions of dollars into the political system and politicians don't like to mess with them. An example is the recent federal budget when the Prime Minister, leading up the budget promised "Canada's retirement income system will see some ‘necessary’ changes in the coming months."
What did we get? An increase on the Old Age Security to age 67 for those Canadians who will not have gold-plated pensions. The much needed reform of MP pensions - expected to lead the way for others to follow - was put off until after the next election in four years.
It appears many for these plans are terminally ill.
We urge all Canadians to phone, email or visit your politicians at all levels and ask them to get real about the pension tsunami drowning taxpayers.
Bill Tufts, Fair Pensions For All, founded in January 2009, our goal is to promote an honest and fair analysis of our pension system; to expose abuse and waste within the system; to develops and promote new ideas and concepts on pensions based on fairness for all.
We maintain that it is every Canadian’s right to receive sufficient income in retirement to afford an acceptable quality of life.
