Pension Planning Centre Blog / Financial Planningtitle_li=Investmentstitle_li=Retirement / Companies get tough on employee pensions

March 2, 2011

Companies get tough on employee pensions

Debt-laden funds. Defined-benefit plans make way for ones with defined contributions
By PAUL DELEAN, The Gazette January 19, 2011  

Companies with large pension-fund deficits are starting to play hardball with employees, and it may just be the tip of the iceberg.

“Used to be that few employers were ready to fight over it, but times are changing,” Michel St. Germain, a partner at Mercer Canada and pension-fund consultant, told the firm’s annual pension-outlook conference in Montreal yesterday.

In Sudbury, a yearlong strike did not deter Vale Ltd. from its plan to switch new employees to defined-contribution plans, in which it makes an annual pension contribution per employee but assumes no financial risk beyond that. Vale’s defined-benefit pension fund had a shortfall of $729 million.

In Hamilton, U.S. Steel Canada locked out 900 employees at the former Stelco plant last fall, in part because it wants to introduce a defined-contribution pension plan for new employees and end indexing for the defined-benefit plan it inherited after purchasing Stelco in 2007. That plan had a deficit of $1.2 billion.

Defined-benefit plans, in which companies provide employees with a set payment in retirement based on years of service, are becoming the exception in Canada because of their cost and the financial responsibility placed on the corporations.

“They’re excellent for employees,” St. Germain said, “and very bad for shareholders.”

Most companies with such plans are running sizable pension deficits, and St. Germain said two years of strong equity markets have done little to improve the solvency level because they’ve also featured rock-bottom interest rates. (Mercer has the solvency index for Canadian plans below 60 per cent, down from almost 100 per cent in 2000).

At a time when they should be getting more conservative, along with their aging workforces, many plans still are carrying a high level of risk because their managers feel it’s the only way to generate the returns needed to make up lost ground, St. Germain noted.

Public-sector plans have the same problems but not the same pressure, since they can pass on shortfalls to the taxpayer, as homeowners who received increased property-tax bills recently can attest. St. Germain said.

“The challenge,” he said, “will be to justify (increases) to taxpayers.”

Defined-contribution plans put the onus on employees to manage their retirement funds, something many are “completely incapable” of doing, St. Germain said. It’s not unusual to find young employees with less than 20 per cent of their nest egg in equities and older ones holding 100 per cent in stock, the exact opposite of what’s advisable, he said.

Still, St. Germain isn’t sold on recently floated proposals to make retirement saving mandatory.

Paying down debt or a mortgage or investing in your children’s future might well be a better option than an RRSP for many people, he said.

But he urged Quebec to take action soon in boosting the contribution rates for the Quebec Pension Plan, since it’s been known for four years the provincial plan is headed for capitalization problems. “At some point, you have to stop analyzing and make a decision,” he said.

© Copyright (c) The Montreal Gazette

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