Pension Terminators?

I just came back from the movies where I saw Terminator Salvation. Not bad, but nowhere near as good as Terminator 2 - Judgment Day, which was a classic in this series.

But far away from Hollywood, real life pension terminators are hard at work. Canadian Auto Workers (CAW) members voted 86 percent in favor of a cost-cutting deal with General Motors Corp.'s Canadian unit as the automaker bids to qualify for more government loans and assure its future in Canada:

According to the CAW, the tentative deal with GM Canada provides that the starting pay rate for new hires will be 70 percent of the established rate with increases of 5 percent per year for six years. New hires will be entitled to the same retiree health benefits, funded either through a new Health Care Trust or by the company.

The deal freezes pensions until 2015, eliminates semi-private hospital coverage and ends tuition assistance for workers joining the company after Jan. 1, 2010. The CAW also said a $3,500 vacation compensation payment has been cut to offset other costs, including pensions.

Under the contract, the union and the company have committed to negotiate a Health Care Trust agreement to provide retiree health care benefits in the future, much like the automaker's terms with U.S. workers. GM Canada also agreed to restructure its underfunded pension plan within a year and move to funding the plan on a solvency basis comparable to the plans at Ford and Chrysler.

Bloomberg reported that Canada’s federal government won’t finance pension benefits retained in a tentative labor accord with GM.

On May 10th, USA Today reported that more companies are freezing pensions:

The number of companies that have frozen their traditional pension plans has accelerated sharply this year, a trend that will likely continue as companies wrestle with declining profits and poor investment returns.

At least 16 companies have announced plans to freeze their pensions so far this year, vs. 18 for all of 2008. Last week, Wells Fargo told its employees that their pension plans will stop accruing benefits July 1.

When a pension is frozen, employees get to keep the benefits they've already earned, but the company usually won't contribute any more money. Older employees are particularly hard hit because they have less time to make up for the loss, says Nancy Hwa, spokeswoman for the Pension Rights Center.

Severe investment losses in 2008 shrank the assets of the nation's largest pension plans to 79% of projected liabilities, down from 109% at the end of 2007, according to an analysis by Watson Wyatt. Companies, already hurting in the weak economy, have to increase contributions to make up the difference, and are facing stricter federal requirements about funding the plans.

More companies will freeze their pension plans unless Congress temporarily relaxes the funding requirements, says Dena Battle, director of tax policy for the National Association of Manufacturers. "When your funding obligations triple and you don't have the cash to deal with that and you don't get relief from Congress, you have to make hard choices," she says.

Pension-rights advocates and some lawmakers support giving relief only to companies that agree not to freeze their plans.

"Congress will be hesitant to provide pension fund relief without assurance that employers would protect benefits of rank-and-file employees and not divert funding relief to other uses," such as corporate bonuses, says Sandra Salstrom, a spokeswoman for Rep. Earl Pomeroy, D-N.D., who is drafting a pension relief bill.

Battle says many plan sponsors would reject relief on those terms. The employer-sponsored retirement system, "has always been voluntary," she says. "We work very hard to preserve that."

Many companies, including Cigna, Gencorp, Fujitsu, and others have frozen their pensions or cut them altogether in an effort to cut costs.

And it's not just companies. In a move that some Republican senators in Connecticut warned was fiscally irresponsible, the Senate voted 29 to 6 last Thursday to exempt cash-strapped Bridgeport from paying any money for three fiscal years into its pension fund.

In the U.K., the FT reports that the CBI employers body is calling for sweeping changes to the framework for regulating and accounting for pensions:

The employers group wants to ease the burden on businesses that are already suffering through the most severe recession in the postwar period.

In an eight-point plan released on Tuesday, the CBI says it believes “it is time to take clear, decisive action to preserve pension schemes and protect sponsors”, particularly those now at a disadvantage because they created a scheme while competitors did not.

The CBI’s plan contains several elements that have already been rejected by the pensions regulator or ministers because they pose too many risks to members’ benefits. But the document highlights the issues that the government might need to consider in an increasingly painful trade-off between the desire to protect retirement benefits and the wish to aid businesses through the recession.

First, the CBI wants the regulator automatically to allow companies to stretch out the time frame, from 10 to 15 years, over which deficits are repaired without special scrutiny, a request that the regulator has considered and rejected.

Although the regulator has said it is prepared to see deficit repair schemes stretched out much longer, it does not believe that it is prudent to skip special scrutiny of even more schemes during a recession.

Furthermore, the CBI is calling on accounting bodies to rethink rules under which liabilities are “marked to market”, giving far greater clarity to how much a company owes its pension scheme. If schemes are heavily invested in assets such as equities that do not move in line with liabilities, pension obligations can appear very volatile.

However, analysts and shareholders have been pressing for more, not less, clarity on pension costs for years. In a recent note, Peter Elwin, head of accounting and valuation analysis at Cazenove and a member of the Corporate Reporting Users Forum, described such pleas as a “let’s turn the telescope round because it makes the elephant look less worrying” approach, which he said “has lost all credibility as a potential solution”.

The CBI wants government to compensate companies more fairly for obligations they have taken on that would otherwise have to be paid under the government’s own Serps scheme, and to reconsider proposed taxation of employers’ contributions for higher earners.

It also wants a commitment to freeze levies that employers must pay to the safety net for the underfunded schemes of insolvent employers.

The Globe and Mail's editorial on Monday discussed pensions for the pensionless:

In a series of recent speeches, the heads of several of Canada's largest pension plans have warned that a steadily increasing number of Canadians do not have workplace pension plans, and that most are not saving enough on their own to provide an adequate retirement income. And their message has gone beyond hand-wringing.

The pension leaders are proposing bold solutions, debating designs for some form of innovative government-sponsored pension plan that would manage money for the 75 per cent of Canadian workers who do not have a company plan. But while the "super-fund" proposals have garnered much attention in the world of pension managers and actuaries, they remain virtually unknown to the broader public. That must change.

As Jim Leech, head of the Ontario Teachers Pension Plan, observed last week, we'd all love to be rich, but what we really don't want to be is poor. But a C.D. Howe Institute report has concluded that only one-third of Canadian households are saving enough to meet their projected basic household expenses by 2030, leaving two-thirds of the population not saving enough to cover their non-discretionary costs in the future. Beyond the personal toll, Mr. Leech says this will also create a broader economic drag, as a growing portion of the population becomes unable to contribute meaningfully to growth.

This failure of Canadians to save adequately is not a new story, but is becoming more critical as a increasing percentage of them find themselves without a workplace pension plan. The problem has been spurred on in recent years by the decline in union membership and rampant job cuts in the manufacturing sector - both traditionally associated with pension-plan coverage. It has also been worsened by large numbers of companies cancelling their traditional pension plans or closing them to new employees, arguing that the cost of the obligation is too onerous or the volatility of funding demands too risky. But while the costs can be high for plan sponsors, pension-fund managers are now voicing a compelling counterargument that there is still no more efficient way for workers to save for retirement. Traditional pension plans are cheaper to operate, with administration costs typically only a fraction of the fees paid on personal savings vehicles such as mutual funds, and managers can take advantage of long time horizons and scale across a broad population, in order to save most efficiently for generations of retirees.

Two wide-ranging recent reports on pension-fund coverage - one commissioned by the Ontario government and the other jointly commissioned by the governments of Alberta and British Columbia - have urged the creation of new types of pension plans to ease the funding burden on companies, while greatly expanding the reach of retirement coverage to more workers. The Alberta/B.C. report, for example, proposes creating a new arm's-length agency to provide pensions to the 80 per cent of the workers in the two provinces without a workplace plan. It would be available on a voluntary basis to employers, individual employees or self-employed workers, and would provide pension levels that would vary depending on investment returns. While the provinces would finance the start-up costs, they would not be expected to bear any continuing costs or liabilities.

Others have proposed a federal pension plan, similar in structure to the Canada Pension Plan, with some advocates suggesting it should be mandatory to all workers who lack a company plan, and others arguing it should be voluntary, just for those who wish to join. Some models propose a traditional plan with a guaranteed payout level at retirement; others suggest a more contemporary one with no guaranteed payout amount and pensions based on the fund's investment returns. Still others suggest a hybrid of the two, with a minimum guaranteed floor of payments plus extra payments based on investment returns. Around the world, in countries such as Britain, the Netherlands and Australia, various reforms and new models are being tested, all with the aim of creating universal pension coverage for workers.

It is time for Canada to begin mulling on its own best solution, but that will require an appetite for reform. The first step is to win broader public recognition that there is a looming pension crisis that must be dealt with now, decades before today's younger workers retire without adequate incomes. As Mr. Leech warned in his speech, it is easy for politicians to ignore a problem so distant in the future, but that this is the reckless behaviour of "credit-card junkies who can charge the bill to our kids." Across Canada, provinces and the federal government have recently unveiled short-term solutions to help companies facing pension-funding problems, offering companies more time to make up shortfalls in their plans.

The relief is needed, but it does not answer the questions about the longer-term viability of pension plans, and does little to convince companies to maintain traditional pension plans or to create new ones.

Broader solutions are now beginning to emerge, and pension experts are growing excited by the possibilities. But there must be political support before major reforms can be enacted, and the pension crisis should be front and centre in the next federal election. The issue needs a high-profile champion willing to lead the effort to create a new institution that could be as important to Canadians as the Canada Pension Plan. With many workers still shocked by the financial devastation to their retirement nest eggs from the market's collapse last year, there should be strong support for the right solution.

And now Ontario is spearheading an effort at Monday's meeting of Canada's finance ministers to get Jim Flaherty, Canada's Minister of Finance, to turn his attention to concerns that Canadians are ill-prepared for retirement as the recession erodes savings:

Ontario Finance Minister Dwight Duncan will push for a national summit on pensions during the meeting – asking Ottawa to take a leading role in a debate over whether governments need to take steps to help Canadians' bolster their retirement nest eggs.

Last year, an Ontario commission on pension reform called for governments to investigate expanding the Canada Pension Plan or creating a comparable program to enhance coverage for workers.

I say now is the time to hold a national summit on pensions and perhaps even an international summit on pensions, because what is happening in Canada, is happening all around the world.

[Witness Australian reaction to a decision to raise the pension eligibility age which has mirrored the UK experience and is being heavily criticized.]

When it comes to pensions, governments and companies can't just keep saying "I'll be back".

Finally, Monday was Memorial Day in the U.S. and made me think of the young men and women fighting abroad, as well as those that were killed or wounded in battle. Please take the time to watch this CBS news report on a remarkable U.S. Navy SEAL.

When it comes to heroes, nothing compares to the ones in real life. Their humility and dedication is truly inspiring.

***Update***

Here are some more stories for you to read:

The financial position of the Pension Benefit Guaranty Corp. again is rapidly deteriorating, triggering fears that a taxpayer-funded bailout may be needed to shore up the government's pension plan insurer.

Half of UK adults aged between 20 and 60 are not putting aside any funds into a pension, a survey commissioned by the BBC suggests.Half of UK adults aged between 20 and 60 are not putting aside any funds into a pension, a survey commissioned by the BBC suggests.

More and more Canadians are relying upon defined-contribution pension plans for their retirement, according to a new study released by Statistics Canada Tuesday.

Financial Planning reports that the downturn is accelerating the demise of the traditional pension.