Private sector pension crisis threatens all Canadians

June 5, 2012

The Calgary Beacon Online News

May 23, 2012

Much is being said about Canada’s crushing public sector pension debt, now estimated to be more than $300 billion. Few Canadians, however, 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.

The fortunate few

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 they 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. The same is true at Air Canada. 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. For how many other employees would pensions in excess of $60,000 be considered a problem?

Pension plans that can’t achieve the required investment returns (which is pretty much every DB plan in the country over the past five 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.

The stock markets have not been kind to pensions in the past few years. The current S&P/TSX return is now down five per cent in 2012, down 15 per cent over one year and 19 per cent over five years. On the other hand, most pensions are based on estimated salary increases of 4.5 per cent per year and count on the markets providing six per cent to seven per cent return. Not only does the plan now have to make up the five year 19 per cent loss but another estimated 35 per cent to 40 per cent return on the markets.

When the market returns are not sufficient and the employee contributions are not enough, the plan plunges into deficit.

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.


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