Friday, November 16, 2012

Canadian Pensions Flying Off Course?

Reuters reports, Air Canada seeks C$150 mln special pensions cap, letter shows:
Air Canada wants to cap special payments toward its pension fund deficit at C$150 million ($150 million) a year for the next decade, a letter from Chief Executive Calin Rovinescu to Finance Minister Jim Flaherty shows.

The April 26 letter, received by Reuters on Thursday under access-to-information legislation, formally requested a cap of that amount from 2014 through 2023, as long as the pension fund remained in deficit.

Air Canada has already won approval from its labor unions and its pensioners for a cap, but as recently as Nov. 8, Rovinescu declined in a conference call with analysts to confirm that the amount of the cap he was seeking was C$150 million.

Rovinescu said the C$2.2 billion increase in Air Canada's pension deficit during 2011 was the result of a reduction in the discount rate used to calculate pension liabilities, to 3.3 percent from 4.5 percent.

"This is not sustainable in the current context, assuming no material increase in interest rates," Rovinescu wrote to Flaherty.

He said the increase brought the total deficit to C$4.4 billion. The airline, Canada's largest, has subsequently revised that down to C$4.2 billion.

Air Canada, like other employers with defined-benefit pension plans, has been badly hurt by the decline in the interest rates that are used to calculate solvency gaps.

All but 7 percent of Canada's federally regulated, private defined-benefit plans were underfunded at end-2011, the federal supervisor said on Oct. 5.

In his conference call with analysts on Nov. 8, Rovinescu said, "We have no assurance of being able to get anything along the lines of what has been asked" for a cap on the special pension payments. "I think that there were some references that were made in the arbitration materials that talked about the numbers along the lines of what you've indicated.

"We're not able to confirm that's been granted, and so we're hopeful of having funding that's satisfactory, but until it's done, it's not done."

Following approval by the unions and pensioners for the cap, the airline is now awaiting Flaherty's decision on whether to approve it. Flaherty's office has so far declined to hint when he will decide.

In 2009, Air Canada won agreement from the government for a moratorium on making any special payments to reduce its pension deficit through 2010, and then a cap on special payments that would rise from C$150 million in 2011 to C$225 million in 2013.

Justifying his request, Rovinescu told the finance minister how the airline had "worked diligently to address our pension solvency challenges."

The pension plans have delivered top quartile performance in the past three years; the company paid C$1.8 billion in pension payments over five years; and negotiations with unions were expected to reduce liabilities by C$1.2 billion, he said.

"However, despite these significant and hard-fought achievements, the stability and sustainability of our DB (defined-benefit) plans continues to be threatened for reasons completely beyond the company's control," he said.
Air Canada's pensions have delivered "top quartile" results in the last few years ever since they (finally) cleaned up the previous pension fund managers and replaced them with a competent team. Unfortunately, Mr. Rovinescu is right, the stability and sustainability of their defined-benefit plans "continues to be threatened for reasons completely beyond the company's control."

The main problem  with Air Canada and many other Canadian corporate plans offering defined-benefit plans is they're fighting a losing battle. Corporate Canada's pension hole is too deep and all the proposed short-term fixes, like tweaking the discount rate or capping the amount to cover pension deficits, are only kicking the can down the road.

However, Bernard Dussault, Canada's former Chief Actuary, shared these insights with me:
It is the CFRS' (Common Front for Retirement Security) view that as a general rule no individual pension plan sponsor should be provided with better means than average to address its pension shortfalls, especially if the concerned company is not on the verge of bankruptcy. CRFS’s rationale for this view is that pension liabilities should prevail over any other liabilities of the concerned company because pensions are deferred salaries.

Nevertheless, it is desirable that current pension deficiencies be subject to less stringent amortization rules not only because of the historically high levels of investment losses in 2008 and 2010 but also because pension deficits are now determined using the unrealistically conservative assumptions of a solvency valuation. On the other hand, any alleviation of deficit amortization rules should be designed on a standard basis applying uniformly to all Canadian defined benefit pension plans.
In my opinion, the only real fix to the private sector's pension woes is bolstering defined-benefit plans using an approach that works. Companies need to focus on their core business, not pensions. Pensions should be managed by large, well governed defined-benefit plans.

Instead of offloading pension risk to insurers or shifting it to defined-contribution plans, jeopardizing the retirement security of millions of workers, the Government of Canada needs to step up to the plate and enhance the Canada Pension Plan (CPP) and/ or create new, well governed defined-benefit plans which manage all these private sector pensions the same way CPPIB and other large Canadian DB plans are managed, ie. with independent investment boards who operate at arms-length from the government.

But don't hold your breath. When it comes to pensions or fiscal cliffs, politicians always opt for "easy" solutions like kicking the can down the road or "dumb" solutions like shifting workers into defined-contribution plans, ensuring more pension poverty down the road.

I was, however, pleased to see the Ontario Liberals blocking the federal government's new pension plan option
The Ontario Liberal government is blocking a new pension option that would give employees another way to save for their retirement if their workplace doesn’t provide a plan, Tory MPP Julia Munro says.

The Liberals have tied their support for Pooled Registered Pension Plans (PRPP) to increases in CPP payments, she said.

“This just does not make any sense whatsoever and actually hurts Ontario businesses,” Munro said Thursday.

Satinder Chera, vice-president Ontario of the Canadian Federation of Independent Business (CFIB), said the PRPPs have been taken “hostage” by the Ontario government to push through its own agenda.

“They’re hellbent on seeing CPP premiums rise,” Chera said.

PRPPs offer people who don’t have a workplace pension — such as part-timers and the self-employed — an option to participate in a large plan.

Contributions could automatically come off the participant’s paycheque but the pension would stay with the worker regardless of place of employment.

The Stephen Harper government introduced legislation that provided a framework for PRPPs, and the House of Commons passed Bill C-25 in June.

Since 90% of industries come under provincial jurisdiction, the Ontario legislature would need to pass legislation to allow PRPPs.

Ontario Finance Minister Dwight Duncan was unapologetic Thursday as he continued to call for CPP increases.

“Ontario is willing to support the implementation of PPRPs, but on their own they are not effective,” Duncan said in an email.

“That is why we have been calling on Ottawa for years to put in place a gradual, modest increase to the CPP — a proven savings plan that benefits everyone.”

Duncan accused the Tories of supporting federal PRPP legislation for political reasons.

“What we are seeing is (PC Leader Tim) Hudak’s PCs taking their marching orders from their bosses in Ottawa again instead of looking out for the best interests of Ontarians,” Duncan said in a statement.

“It’s true that PRPPs ask people to put money aside for their future. So do RSPs and there are hundreds of billions of dollars of unused RSP room in Canada.”

Chera said the Ontario Liberals should weigh the PRPP proposal on its own merits, rather than using it as a bargaining chip in federal-provincial politics.

“It’s quite unfortunate,” Chera said of Duncan’s position.

A Canadian Federation of Independent Business survey of members found that about 80% of small businesses owners do not have a retirement plan in place for themselves or their employees.

Another member survey found 34% would consider participating in a PRPP plan if it was available, 35% were not interested and 30% were not sure.
With all due respect to Tory MPP Julia Munro and Satinder Chera of the Canadian Federation of Independent Business, they don't have a clue of what they're talking about. Ontario's Finance Minister, Dwight Duncan, is absolutely right to dismiss PRPPs, a dead giveaway to banks and insurance companies that will do nothing to address the looming retirement crisis.

Harper's government has made many good moves on the economy, PRPPs was definitely not one of them. Having worked as a senior economist at the Business Development Bank of Canada (BDC), I can tell you that most Canadian small businesses are not properly informed of what is in their and their employees' best interests when it comes to pensions. Moreover, the CFIB surveys are a joke, which is why 2/3 of the respondents stated they were not interested or not sure of PRPPs (if they were properly informed, the number would be significantly higher).

Canada and the rest of the world need a reality check on pensions. We can continue tinkering on the edges, hoping for the best, or step up to the plate and move ahead with solid long-term solutions to the looming retirement crisis. Nobody said that being a politician is fun during the age of austerity, but it's time for governments of all stripes to stop squabbling over nonsense and start implementing real reforms that are in their country's best long-term interests.

Below, Jacquie McNish, business writer for the Globe and Mail, talks about the national pension crisis. Workers are losing their benefits as companies go under. Retirees are under siege and a disturbing number of Canadians don't even have a pension and haven't saved enough to retire (originally aired November 2009).