Canada Post struggles under the burden of Legacy Costs

May 20, 2011
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Courtesy: Women Who Dance With Frogs

It looks like Canada Post is on its way to a strike. Lets hope is does not have major implications for your business.

There is an excellent site that is keeping current information as the Canada Post negotiations progress. Info Post

A interesting page at Info Post highlights the difficulties with the pension plan. It shows that last year for every dollar that employees contributed, the company funded $4.21. The pension plan is in big trouble despite these contributions. The company made a special contribution of $425 million to the pension to go towards the deficit. That was in addition to the normal contribution of $325 million for a total of $750 million spent on the pension in 2010.

The Canada Post plan has an estimated solvency deficit of $3.2 billion.

Canada Post seems to be trying to deal with some very long term business problems that exist with their legacy costs. To encourage Canada Post management the CFIB President, Catherine Swift sent this letter to the CEO of Canada Post. Potential Canada Post Strike

Canada Post has not provided a detailed breakdown of their legacy costs or OPEB’s (Other Post Employment Benefits). Sick day payout is one of them and the total costs of all it’s Future Benefits Liabilities is around $2.8 billion.  This is in addition to its $3.2 billion pension shortfalls.

Lets compare it to Toronto’s Future Employee Benefits Liabilities of $2.4 Billion for a fairly accurate estimate of those costs.
’000′s
Pension liabilities, other than OMERS                               109,685
Sick leave benefits                                                            429,000
WSIB obligations                                                              357,725
Other employment and post-employment benefits        1,565,054  (Healthcare)
Total employee accrued benefit obligation                 $ 2,461,464
The biggest of these is the free healthcare offered employees (OPEB’s) from retirement until age 65. Once again, how many small business employees  have access to group insurance and how many get it once they are retired? 

Benefit Changes Required for Current Employees
These organizations need to understand that the benefits for existing employees need to be changed. If they went to a DC plan tomorrow for new employees.the grandfathered ones would still be on the plan for another 35 years.

The problem with the pension plan is rapidly rising wages that create higher benefits based on the 70% formula.

The Canada Post pension plan has had fairly good performance. Despite this the shortfalls keep rising.

2008 – The Plan held total net assets of $11,709 million compared with $14,666 million the previous year, representing a decrease of $2,957 million, a return of -17.6%. Despite this the Plan ended the year with an estimated solvency deficit of $1,190 million as of December 31, 2008. This represented a solvency funding ratio of 91%,

2009 - The Canada Post pension plan (the Plan) ended 2009 with total net assets of $13.576 billion, an increase of $1.867 billion from 2008, return of 16.2%. Despite this the Plan ended the year with an estimated solvency shortfall of $2.007 billion, representing a solvency funding ratio of 88 per cent. Plus they contributed $440 million extra into the plan this year to help make up for shortfalls.

2010 - The Canada Post pension plan (the Plan) ended 2010 with total net assets available for benefits of $15.376 billion, an increase of $1.8 billion from 2009, 10.4% rate of return. Despite this the Plan ended the year with an estimated solvency shortfall of $3.22 billion, representing a solvency ratio of 83 per cent

So as you can see the impact of 2008 market returns were relatively small compared to the cost of rising wages rates. Some pensions had large shortfalls because they changed assumptions for rate of return, but the CP plan in 2009 used an expected long-term rate of return on plan assets 7.25%!!!

Good luck dealing with these challenges. With the public resentment towards the gold-plated benefits and pensions Canada Post employees have, there will not be too much public sympathy to this strike.

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