A stalemate on pensions leaves workers in the lurch

Defined Benefit pensions may be a pipe dream rooted in the past, but governments and employers haven’t created a suitable alternative—and workers deserve better

A Canada Post letter carrier delivers mail by foot to houses in Vancouver, B.C. (Ben Nelms/Getty)

A Canada Post letter carrier delivers mail by foot to houses in Vancouver, B.C. (Ben Nelms/Getty)

After a long, tense summer in which lockouts and strike action were threatened, Canada Post finally came to an agreement with the Canadian Union of Postal Workers (CUPW). The reasons for the standoff were many, including staffing levels for long routes (which often required overtime to cover), and pay equity for rural carriers—mostly women—who made 28 per cent less than their urban counterparts. But one issue remains unresolved: Canada Post wants to switch new employees from a defined benefit (DB) plan to a defined contribution (DC) plan. The fact that Canada Post and the CUPW punted on this issue is no surprise. It seems no organization, whether public sector employer, private employer, or government agency, can figure out exactly what to do about pensions. With middle-class incomes remaining stagnant, the cost of living increasing, and retirees living longer than ever, this stalemate is leaving workers in the lurch.

To the extent that Canadian employees even have a pension plan (and fewer than 40 per cent do), defined benefit plans are the gold standard. DB plans guarantee an annual income to retiring employees based on several factors, including age at retirement and whether a spouse will receive payments if the retiree passes away. Under DB plans, employers are taking a huge risk: if the investment returns generated by the pension managers aren’t enough to cover the payout to retirees, it’s up to the employer to make up the difference. Unfunded liabilities made up roughly $10 billion in employer contributions in 2014, and in the 2012-13 period, they jumped by 25 per cent.

RELATED: Why both sides in the Canada Post dispute are in bad position

On the other hand, DC plans shift market risk away from employers, and drop it into the lap of employees. Full disclosure: I work for a company that administers DC plans. Also, Rogers, the parent company of Maclean’s, offers only DC plans to its new employees.

There are no guarantees with DC plans; all that’s known is how much the employee will contribute to the plan, and how much the employer will match. Typically, employees are required to contribute at least two per cent of each paycheque into a DC plan, and employers will kick in an identical amount, matching the employee up to five per cent of their salary. In most DC plans, the employee is ultimately the investment manager: a third-party investment company will provide a menu of investment funds, and employees make the choice. If they’ve chosen well, their contributions, the employer-matched amounts, and the compounded returns generated by the funds will leave a large enough lump sum for the employee to retire on.

Here’s the problem with that. Middle-class workers—mail carriers, as well as health care workers, electricians, and carpenters—are not money managers. Though investment companies offer education seminars, one-on-one sessions, online literature, and over-the-phone support, employees often become overwhelmed, and choose poorly. They’ll pick attractive-looking funds based on their past investment returns, which is no guarantee those funds will continue to perform well. Or they’ll pick funds that appear safe, like GICs, which offer interest rates too low to keep up with inflation. Some don’t choose at all, and their contributions accrue next to nothing in money market accounts. On top of these pitfalls, employees often forget to check in, and as their life circumstances change, their investments don’t. Replacing DB pensions one-for-one with DC plans is akin to an orphanage laying off the cafeteria employees, and handing keys to the larder over to the kids.

RELATED: Were people worried about a Canada Post labour dispute?

This isn’t to say DC pension plans are a bad option: they’re not, and can offer a great supplement to other employer-sponsored accounts. But DC pensions can’t possibly live up to the false, 40-years-and-a-gold-watch hopes offered by DB plans. Back when middle-class families could afford to buy homes on a single income, and when interest rates were in the high single digits, DB plans could provide a lifetime guaranteed income for retirees. Decades ago, investment managers could make reasonable forecasts when bonds were fetching seven and eight per cent interest. Now, with interest rates pressed into the low single digits, managers are forced to chase riskier investments and are left at the mercy of fickle markets. And where once employers could use DB pensions to attract talented prospects and prevent good employees from leaving, they’ve become an ever-widening hole in the budget. Public sector employers struggle with them, and the private sector has mostly ditched them altogether.

Theoretically, government could try to mitigate the risks of pension uncertainty by expanding the Canada Pension Plan. In July, Prime Minister Justin Trudeau promised to do exactly that, with a gradual increase in CPP benefits beginning in 2019. But even if government were to solve this problem in the short term by absorbing pension liabilities, all they’ve done is guarantee future budget deficits, if not higher inflation risk.

It’s a good thing Canada Post and the CUPW worked out an agreement. A postal disruption would have caused massive headaches for retailers, small businesses, and people who depend on their benefit cheques being delivered on time. But the still-unresolved pension question will have to be addressed, and soon. The reality is, we’re not living in the 1970s, and DB pensions have become a social pipe dream. Neither government nor employers have created suitable alternatives. With this much uncertainty in both the job and investment markets, we can’t keep kicking this can down the road.


A stalemate on pensions leaves workers in the lurch

  1. In 1975…..postal union president Joe Davidson famously said “to hell with the public,”

    I don’t think Canadians have cared much about postal workers since then

  2. Public sector DB plans need a rethink. And it ain’t gonna be easy! Anybody who dares to tinker with these pension rights will be crucified. Canada Post is just tinkering with new hires as a baby step. Other public sector are only hiring on contract to avoid the issue. The bottom line is the taxpayer is on the hook for this massive risk and it just rubs salt into their wounds. As it is, public sector workers have not “suffered” as much as private sector workers. And many voters resent these guys who are living off their tax dollars with secure jobs and gold plated pensions. with no anxiety because their jobs are secure. It ain’t fair! And “government workers” are looked at with disdain already doing very little for their money. We see evidence of the inefficient city workers every day. Police officers doing traffic duty at exorbitant wages.

  3. What irritates me about DP is that they change fund managers every 5 years or so. We end up losing because of fees and what the market is doing.

    There must be an alternative but you know how the mind doesn’t work.

  4. Governments have to bear most of the blame here. Uncontrolled increases in taxation, spending, and government debt literally erased the concept of private savings. Plus, any savings outside of RRSP’s are heavily taxed. Plus, private sector workers have a lower threshold at which their savings are taxed.
    For decades, successive governments at all levels have conspired to unfairly enrich public sector workers. Worse, they’ve been cowardly about it by hiding the true costs of the defined benefit pensions in the unfunded liabilities. This has been compounded by increasing the employer’s contribution in order to close the funding gap. Where I live, this meant that our civic workers got a 4% raise just on the pension portion of their pay at a time when the private sector has been enduring layoffs and pay cuts. It amounts to $150 per year in extra taxes just for my house alone, just to close but not eliminate the pension shortfall for our city workers. The cost of closing up the unfounded liabilities of all the public sector plans out there is in the thousands of dollars per Canadian family per year. If we’re already struggling to save our own money for our own retirements, how can we possibly be expected to fork over thousands more in taxes every year just to save public sector pensions? Why would we be expected to do so?
    Right now, the public sector pensions represent a tremendous boon to public workers, and a tremendous burden to taxpayers. To attain retirement incomes from private savings that would match that of a career public sector worker requires an unsustainable level of sacrifice by a private sector worker. Why would private sector workers of any income level expect to live substantially poorer (by five-figure margins) than similarly paid government workers for decades, just so they can retire as well as someone who CHOSE a government job? Why should we expect to provide pensions to middle-class earners that are similar to what many small business owners might expect after cashing out years of risk and re-invested profits?
    The true pension reform that has to occur is within the public sector. Governments need to accelerate the fall of many of these plans into insolvency, simply by refusing to bail them out. Don’t forget, 75% of the burden of saving those plans is going to fall on just 15% of taxpayers. News flash! We don’t have that kind of money, and you can’t make an ethical or moral argument that supports the massive tax increases that will be required to salvage those pensions in their current form.
    For the most part, 10-20 % reductions in the pension rewards will save them, provided the government’s also move en masse to DC pensions for those still many years away from retirement, and the eliminate early retirement in the interim.
    Across the board, these pension problems are the result of governments acting as co-conspirators with public sector unions to unjustly enrich public sector workers. We can’t begin to solve the problem of retirement for the common, private sector worker until we get them out from under the iron fist of overly burdensome taxation.

  5. Back in the mid-to-late 90’s I was a trustee of a sizeable public pension plan. I saw another side of
    all this. That was the tech bubble era (Pets.com !!) and the markets were stuffed with helium. Returns
    were so high that many employers could justify taking a “contribution holiday” on the assumption that
    the bubble was a forever thing. It wasn’t. When the bubble burst there was a deep hole to be filled.
    Many employers didn’t bother trying to fill it.
    In the meantime I saw a steady parade of HR and money manager guys flowing through town selling
    employee groups on the virtues of a low premium and high return dream world if they switched from DB to DC. Many people bought into it all because the business pages buffed and polished and swooned.
    Fortunately, my own pension plan wasn’t one of them.

    • But the fact is that very, very few private sector businesses could begin to afford to fund a defined benefit pension, at least of the variety that is enjoyed by the public sector. The only other option then is a fully funded defined benefit plan that pays out based on zero percent interest. In that case, the employee is better off saving and accounting for themselves.
      The first step in fixing the problem of inadequate savings is to eliminate or radically reform the public sector plans. The savings accrued must be passed directly back to the taxpayers. That’s the first step. If that step is not taken, then any and all discussion on this subject is essentially moot.
      It’s the same as discussing the altitude at which a skydiver must open his parachute. It’s all moot if the guy never leaves the airplane.

  6. What short and selective memories Canadians have.
    In April 14 1999 using Bill C-78 the federal government removed $30 BILLION ‘surplus’from the public sector superannuation fund. The government which had paid in 48% of the fund in 74 years removed 100% of the deemed surplus. The very next year in October the federal government handed the remaining funds to those who had paid into it, RCMP, Veterans, Public Service, and the Post Office in the hopes that they would no longer be responsible for any shortfalls.

  7. In reality, the parties find themselves in this predicament for many reasons, but the not the least of which is the distant relationship between the Corporation and those employees on the front line serving Canadians from coast to coast. Since this relationship is so fractured, employees do not get the benefit of direct communication with the leaders that develop the strategies that guide the enterprise, or the healthy discourse and course corrections that would occur if in fact those conversations had taken place over the years.
    Instead, only a few leaders from CUPW sit face to face with the negotiating CPC surrogates at the bargaining table where the gaps are now substantial, where positions are entrenched after years of silence and lost opportunity to find common understanding.
    This is not a Union battle, nor one of ideology – as CUPW would like you to believe. In fact Canada Post employees are in this position because the nature of the services and products CPC sells to Canadians has changed dramatically in a short period of time, and CPC finds itself still with both a public mandate, and in fierce competition to survive against the private sector.
    For most of its 250 years CPC and its employees enjoyed a protected monopoly for its main line of business – letter mail. Steady predictable growth allowed the (now) Crown Corporation to execute the perfect business model. Keep costs in line with top line sales inside of prescribed price increases, and life was good. Employee Relations – from a business perspective – frankly did not matter.
    The simple reality today is that if Canada Post is to remain an entity, it must compete and win in its remaining “growth” lines of business: Marketing (addressed and unaddressed ad-mail) and Parcels.
    The same technological changes that caused the decline in letter mail have created the opportunity to deliver the growth of on-line shopping. As this occurred so quickly (relatively), CPC has benefited from an automatic 65-70% market share of this business in Canada – a huge market share in any business – let alone one that’s growing at 8-10% a year. That’s the good news….The bad news is anyone can deliver parcels in Canada, and the competitors are both growing, and figuring out how to combat CPC’s competitive advantage (the network that covers every point of call in Canada).
    Following the euphoria of this new found source of revenue, CPC is starting to see the market share erode despite still growing overall sales….
    In terms of marketing, CPC’s sales in this area have been flat or slight decline in years, in part because of neglect, and in part because to the lack of cooperation between CPC ant CUPW. This business can and should be a growth engine…
    All this to say the approach CPC and its employees must take to survive is clear:
    1) Drive a customer focused culture that exceeds expectations of Canadians
    2) Drive costs down to be competitive with the private sector – lets be honest, doesn’t it make sense to take costs out like “door to door” rather than trying to find them only in places that are really important to employees – seriously why is the Union fighting this fight? (answer: loss of dues revenue as CPC right sizes its employee population)
    3) Grow a culture of trust between CPC’s leaders and its employees – without this element, its only a matter of time….No Company with such poor relations can survive the fight in the private sector
    4) Be nimble – no union in 2016 needs a 600+ page collective bargaining agreement – put it into the museum and bargain a fifty page CBA that ensures employees working conditions are clear and build the rest on trust and dialogue
    5) As an employee of CPC, you would be shocked at the millions of dollars spent both by your Unions and the Company each year on administering the CBA – couldn’t that be spent/invested differently?
    Perhaps most simply put: The enemy is not within! The enemy is the competition. Until the Union and Company orient themselves to this reality, the future is bleak for CPC as we know it.
    There are no easy answers to the challenges facing CPC, and yes fixing the pension plan for the long term is definitely one of the thorny issues that will have to be addressed. The private sector started addressing this issue 20 years ago, and its simply a reality.
    To CPC employees: Despite everything that has been said, you are intensely proud of what you do to serve Canadians. – That is a strength and competitive advantage for CPC. You deserve more from those who represent you and those who lead you. You should demand more from both. Not more rhetoric, not more blaming politicians, not more pointing fingers. Demand both parties put the plan in place to put CPC on course to eliminate costs and grow the lines of business that will sustain your jobs.
    Once that is done, perhaps employees can sit down with their leaders and talk about other ways to build new businesses to compliment the core competencies. Wouldn’t that be a pleasure…
    Good Luck – We have a great deal of respect for the men and women who work for CPC!