What Happened to CAW's Pension Guarantees?

GM pensioners showed up at a federal government announcement on funding for harbor cleanup to ask the Finance Minister Jim Flaherty what the government would do to save pensions if GM goes bankrupt (click here to watch the video):

It was supposed to be a good-news story involving millions of dollars in federal funding to clean up Oshawa's harbour, but it quickly turned into a heated exchange between the finance minister and concerned GM pensioners.

Jim Flaherty gathered the media yesterday at Parkwood Estate, 270 Simcoe St. N., to announce the federal government's plans to invest $9.2 million over the next two years to clean up the contaminated Oshawa Harbour, marina lands and the west wharf in his home riding.

"A great deal of work has been done to get to this point," he said, adding that it's "a very substantial commitment of federal tax money."

And Oshawa MP Colin Carrie explained the cash injection will create jobs and give a much-needed boost to the local economy, which has been hit hard recently by cuts in the auto sector.

However, before the applause had even waned, Flaherty and his parliamentary secretary suddenly found themselves bombarded by questions from irate General Motors retirees demanding to know what the government will do to protect their pensions if their former employer goes belly up.

"Your government asked me to take a haircut as a retiree," Larry Ladd, 66, shouted as the floor was opened to questions. "I took the haircut, but, dammit, I'm not going to let you scalp me on my pension, too."

Ladd, who retired from GM in 1996, said pensioners have had some of their benefits cut in recent contracts.

And now they're concerned their pensions could be in jeopardy if the struggling automotive company ends up filing for bankruptcy.

Another retiree wondered how the government can fund automobile warranties in the event of bankruptcy but it isn't able to protect pensions.

"Listen, this is a very serious time!" a frustrated Flaherty said sternly. "All of these issues being raised about jobs, about pensions, about whether or not General Motors can survive and in what form, and whether Chrysler Canada Ltd. can survive and in what form, these are very major questions that are being discussed right now in a serious way."

Flaherty said the downturn has hurt many companies and the job losses will likely continue in the coming months.

Job losses are soaring. Statistics Canada reported on Thursday that the unemployment rate jumped to a seven-year high of 8 percent last month and the economy lost 61,300 more jobs, resulting in the sharpest five-month employment decline since the 1982 recession.

The manufacturing sector has born the brunt of the job losses, especially in Ontario where the auto industry has been hammered by the sharp decline in auto sales. And now, the government of Ontario warns that GM could swamp the pension safety net:

There is not enough money in Ontario's pension plan safety net to support GM pensioners if the company goes bankrupt, Premier Dalton McGuinty warned yesterday.

"The money available in that is very, very modest," McGuinty said, noting the Pension Benefits Guarantee Fund totals about $100 million – not nearly enough to cover the billions of dollars involved in the automaker's pensions.

"That comes nowhere near meeting any liabilities – for example, for the auto sector alone, to say nothing of all the other sectors," McGuinty told reporters.

Nevertheless, he said Ontario has a "a political and moral responsibility, particularly to older pensioners who worked in the industry and played by all the rules (and) made their investments in their own pension plans."

But McGuinty said topping up the safety net may not be an option.

"We would never have all the money that would be needed to top it up to meet all the demands for all Ontarians who are experiencing troubles with their pension plans," McGuinty said.

Federal Finance Minister Jim Flaherty said the pension fund was tapped during Algoma Steel's difficulties when he was finance minister of Ontario.

On Tuesday, federal Industry Minister Tony Clement said Canadians need to be prepared for possible bankruptcy filings in the auto sector. He announced a $185 million program to guarantee warranties for cars purchased from GM or Chrysler and another $700 million for parts manufacturers to insure against non-payment from the troubled car firms.

The provincial safety net fund, meanwhile, has been underfunded since its inception, said Ontario Finance Minister Dwight Duncan. "General Motors, was given a `too big to fail' provision so they have not been contributing," he said.

"Even among the other companies, the premiums have never really covered the actual liabilities."

Since 1980, the pension fund has provided the province's retirees with up to $1,000 a month in the event a pension plan fails to provide its full benefit, or any at all.

Experts warned in February that the unique safety net was teetering on the edge of being wiped out and could fold if a large corporation were to go under.

Still, it is the retired autoworkers who are the innocent victims of the crisis, Canadian Auto Workers union president Ken Lewenza said.

The provincial government shares responsibility for the GM pension crunch because of a 1992 loophole (opposed by the CAW) in the Pension Benefits Act that allows GM to fund its pension to a weaker standard than other employers, he said.

Even when GM Canada was profitable in the 1990s, it underfunded its plan, Lewenza said.

McGuinty said the idea behind the pension safety net program was to transfer funds to employers of firms facing bankruptcy via the fund, rather than through government.

"What has happened," he said, "is the amount required to be paid into that fund by businesses was grossly inadequate."

And now, the automakers' pension funds don't have enough money to cover their potential liabilities because the stock market crash has decimated investments made with the pension contributions.

McGuinty will be walking a fine line if he's thinking about bailing out the GM or Chrysler pension plans given the shortage of funds in the province's pension guarantee fund, interim Progressive Conservative Leader Bob Runciman said.

That step "would be troublesome to the vast majority of people in this province," Runciman told reporters. "Most Ontarians don't have pension plans."

The government has painted itself into a corner because it has allowed companies to underfund pension plans without requiring the funds be topped up in good economic times.

"They should make sure any shortfalls are looked after," said Runciman, calling for a pay-as-you-go approach to making sure company pension plans are solvent so there is less risk of taxpayers being "left on the hook."

The government needs to step up to the plate to create a different type of protection plan in Ontario, said New Democratic MPP Paul Miller (Hamilton East-Stoney Creek).

Bankruptcy is devastating to workers, he added.

"It could create a terrible situation for their future, their savings, what they have worked all their lives for," Miller said.

We don't just need a new pension protection plan. We need a comprehensive overhaul of our pension system to make sure that nobody else has to worry about the retirement nest egg being jeopardized when a company faces bankruptcy.

The Globe & Mail reports that auto fears prompt tightening of pension rules:

The budget bill also says the legislation will be revised to state that the (Pension Benefits Guarantee Fund) fund's liabilities cannot exceed its assets.

"I really think it's the GM issue," said Mitch Frazer, a pension lawyer at Torys LLP. "This is the last remaining too-big-to-fail plan."

Pension experts estimate GM Canada's total pension shortfall may exceed $6-billion. Chrysler says its plans should be almost fully funded this year.

There are also fears that auto parts makers with large operations in Ontario would collapse if one or both of the auto makers filed for court protection. Some parts companies could fail even if GM and Chrysler succeed in restructuring outside of the courts.

"The government is basically saying 'If we have a whole series of bankruptcies, we're not going to be there to backstop the fund, let's make that very clear,' " Mr. Frazer said. "All you need is one large bankruptcy and you wipe out all the money in the fund."

Canadian Auto Workers president Ken Lewenza said the Ontario government is partly responsible for the pension crisis at GM Canada because of 1992 legislation that enabled the company to underfund its own plans.

"GM has paid a very substantial proportion of the premiums that have been collected over the years by the Pension Benefit Guarantee Fund," he said in a statement. "So for the government to now suggest that retired auto workers would be denied the protection of this fund is unconscionable."

The Toronto Star reports that the CAW is furious at Ontario over pensions:

Visibly upset members of the Canadian Auto Workers said today that they are "furious" that the Ontario government has abandoned its responsibility to retirees by underfunding a provincial safety net for pension funds.

They were responding to Premier Dalton McGuinty's assertion that the province's pension safety net isn't even close to large enough to cover auto workers if General Motors goes bankrupt.

"To suggest that retirees will bear of the brunt of something they have no control over is just unconscionable," CAW president Ken Lewenza said at a press conference today.

"I can't even suggest to you how furious we are as an organization to suggest that our retirees won't be treated with decency and respect during this crisis. What good is a pension guaranteed fund if it's not there when you need it?"

Ontario's Pension Benefits Guarantee Fund is funded by corporate payments, not the government.

Experts warned in February that the fund was teetering on the edge of being wiped out and could fold if a large corporation were to go under.

McGuinty warned today that the fund currently has about $100 million and "comes nowhere near meeting any liabilities – for example, for the auto sector alone, to say nothing of all the other sectors."

CAW pension and benefits director Sym Gill estimated that if GM's Canadian pension plan were to be wound up entirely – meaning it would have to be able to cover all pensioners' benefits now and into the future – it would be about $2 billion short.

General Motors, which is weighing bankruptcy as an option as it continues to work on its restructuring plans, was given a holiday on contributions to its own pension fund by the provincial government in the 1990s, back when it was widely considered "too big to fail."

CAW economist Jim Stanford said it's because of this contribution holiday that GM's pension is so underfunded today. He added that the company was asked to contribute extra to the Pension Benefits Guarantee Fund as part of the deal, and now the government is saying the fund won't be able to cover GM's workers if the company does indeed fail.

Len Harrison, the CAW's retired workers representative, said the situation is unjust.

"All the time General Motors was putting money into the (Pension Benefits Guarantee Fund), it was paying out people, it was paying out pensioners that needed help," Harrison said.

"Then it gets to us and they say, 'Sorry, there's not enough money there, you're out of luck."'

And retired CAW members said they were worried about how they would continue to pay their bills if General Motors or Chrysler go bankrupt.

"It makes me very angry and helpless," said Bernie Heming, 70, who worked for GM for 33 years. "Pension was important to me when I was 20 years old and now I'm 70 and it's not there."

Lewenza called on all retirees who are worried about the future of their pensions to attend a rally at Queen's Park on April 23.

In a report late last year, pension expert Harry Arthurs recommended the province require pension funds to have assets equal to 105 per cent of their liabilities before they can stop putting funds into the plan.

Duncan said the government was looking at Arthurs' recommendations closely because the fund has been underfunded since its inception.

CBC radio inteviewed the union's economist, Jim Stanford, on Thursday. Click here and then click on part two to listen to that interview.

Mr. Stanford laid it all out in very clear terms and discusses the "regulatory fiasco" that exacerbated GM's pension deficit in Canada.

Mr. Stanford reiterated the point: "What good is a pension guaranteed fund if it's not there when you need it?" I couldn't agree more.

Finally, the Toronto Star reports that Canada Post's pension plan lost 19.3% in 2008:

The pension plan at Canada Post lost 19.3 per cent in 2008, hammered by the financial and economic turmoil in Canada and around the world.

The plan held total net assets of $11.71 billion at Dec. 31, 2008, compared with $14.67 billion at the end of the previous year.

The Canada Post pension plan ended 2008 with an estimated solvency deficit of $1.19 billion, representing a solvency funding ratio of 91 per cent.

However, chief investment officer Douglas Greaves said the plan was fully funded on a going-concern basis, with an estimated surplus of $675 million.

"While the short-term impact on investment returns has been negative, the plan is designed to achieve the long-term returns required to fund pension benefits for members, retirees and beneficiaries," Greaves said in a statement.

The Canada Post pension plan is a defined benefit plan that provides inflation-protected benefits to almost 80,000 active members, retired members, deferred pensioners and beneficiaries.

Whenever you hear someone tell you that the fund is "fully funded on a going-concern basis", they are trying to divert your attention away from the disastrous year they just suffered.

[Note: This method of pension valuation assumes that the plan will be ongoing and that its assets must be sufficient to meet its liabilities (the pension benefits promised) when they come due in the future. If a plan is under-funded on a going concern basis, it has an “unfunded liability” which must be “amortized” over 15 years. If a plan is over-funded, it has a surplus.]

This week's posts have focused on the pension crisis and how it will force governments and unions to make some difficult choices in the near future.

Amazingly, very few people are aware of the pension crisis. Even government workers assume their pensions are "untouchable", but the reality is that nobody's pension is safe in this environment.

It is unfortunate that it took a crisis of this magnitude to expose the weaknesses in our pension safety net. Let's hope it doesn't take another one before we fix it.