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The Steelworkers' Submission by National Director Ken Neumann in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:
Department of Finance Canada's Consultation
On Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered Under the Pension Benefit Standards Act, 1985
Submissions on Behalf of The Steelworkers
September 14, 2005
Steelworkers Pension Submission
The Steelworkers are pleased to participate in this open consultation of the Department of Finance Canada on Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the PBSA (1985).
The stated objective of the Department's consultation paper is to seek the views of Canadians on how to strengthen this framework in order to improve the security of pension plan benefits and ensure the viability defined benefit pension plans.
A word on security
The retirement benefits from employer-sponsored defined benefit plans can and do make up a significant portion of a worker's retirement income. Unionized workers negotiate these benefits through collective bargaining while they are still employed. But the benefits they negotiate affect the income they will rely upon for their standard of living in the future. Workers only receive these benefits upon leaving their employment, and therefore upon leaving the bargaining unit from which they negotiated those benefits. Therefore, the security of benefits are of particular importance to workers. No worker wants to see the pension that they counted on change or disappear after they have left the position from which they had the most bargaining power to influence their pension entitlement.
A word on viability
Pension plans involve a commitment today to ongoing payments in the future. These arrangements exist over the long-term. It is in the interest of workers to know that the pensions are regulated in such a way that ensures they remain viable over the long-term. For workers, this means that plans should be carefully managed and monitored. We are well aware, however, that for many of the parties interested in this consultation, 'viability' means making pensions cheaper.
We are concerned the debate's starting point precludes a scenario in which security is guaranteed without reducing today's costs. As workers, we believe that the security is something already owed to us, and not something to be granted provided we enter into a trade-off that sheds some of the pension cost.
The issues for discussion in this consultation for the most part centre around funding and allocating funding surpluses, and not around actual benefit levels. But changes in the framework that place inherent value on reducing the sponsor's short-term costs will inevitably put pressure to place value on reducing long-term costs as well. We are concerned that we are being invited down a path in which the assumed mutual objective necessarily includes reducing the costs of pensions generally. The question of how to ensure this kind of viability begs a particular answer. The only way to really reduce the overall cost of pensions in the end is to reduce benefits. We want to be cautious that 'ensuring viability' isn't reducible to eroding retiree benefits.
Viability must mean sustainability
Too often the Steelworkers have found themselves in defensive battles to maintain defined pension benefits from the desire of employers to cut costs generally. We hope this is not another of those battles. Our pension plans should not become the sponge that absorbs the employer's other financial problems. Workers should not be asked to sacrifice a portion of their retirement income in order to balance the employer's books today, especially if the imbalance is a result of factors external to pensions. So while we are thankful to be part of this consultative process, we recognize from the very beginning that we as unionized workers and future retirees have much to lose or gain depending on what we take viability to mean.
The Steelworkers are willing to work towards solutions that ensure pension viability where this means that they are sustainable. It does not mean simply, or in all cases, that they are more affordable. When viability means sustainability, the priority is first to maintain current benefit levels and then next to look for innovative ways to open up the possibility of increasing benefit levels. This may mean a number of different things, but it can not be taken for granted that the point of this consultation is to do whatever it takes to reduce sponsor costs.
Pensions are not too expensive
The Steelworkers are not opposed to finding effective ways to manage pensions funds over the long term. But it is our position that pension plans are not too expensive in and of themselves. When we negotiate pensions as a component of our future standard of living, it is because we as workers feel we are owed this standard of living. Furthermore, retirement benefits are not inordinately rich. Benefits for individuals are usually tied in one way or another to the level of compensation that the employer had previously been used to compensating that individual as an employee. For example, benefits for individual retirees are generally a function of that individual's past earnings. Furthermore, in most cases, retirement benefits are geared to the individual's past years of service. In other words, the retirement benefits an individual gets from a company pension are related to how much that employee put into the organization. In these ways, defined benefit pensions, at least in principle, are calculated fairly and reasonably. There is nothing about a worker retiring that suddenly makes a pension too expensive.
Is it really a pension problem?
This is not to say that all employers can always afford their pension contributions. Organizations fare differently. It may be true that a company that is failing can not afford its pension contributions. But when the company is truly failing, it can not afford any of its obligations. There is nothing special in this regard about pension contributions. More to the point, companies do not fail because of their pension obligations. For the most part, companies fail because their core business fails. Companies which have run out of funds before paying their pension contributions bring with them problems other than pension costs. Obviously, this varies on a case by case basis. But our general principle is that changes to the legislative and regulatory framework that make pensions cheaper to the plan sponsor should only be pursued where it can be shown that it is the defined pension plan framework itself that has made the pension inordinately expensive.
Issues for Discussion
The consultation paper raises a number of proposals around the surplus. All of these amount to finding ways to increase the extent to which the sponsor can lay claim to any surplus funding. The Steelworkers are not in favour of these particular proposals - first because they rely upon assumptions about the surplus that we do not share, and second because we find it unconvincing that surplus distribution has been a factor in making pensions either non-secure or non-viable.
One specific issue for discussion is whether changing surplus distribution rules to favour sponsors would increase their incentives to fully fund the plan. Another is to set up separate solvency payment accounts that would not count towards the surplus/deficit. This would allow any excess payments to automatically return to the sponsor without ever calling the excess a surplus. A third is a suggestion that partial terminations of federally-regulated plans should not require surplus distributions.
All of these proposals respond to the fairly common assertion by plan sponsors and their representatives that an 'asymmetry' exists in which sponsors alone are responsible for funding shortfalls, but are prevented from accessing any excess funds. The suggestion is that if sponsors are on the line for the deficit, they should at least get to do whatever they want with the surplus. The Steelworkers do not believe an asymmetry exists and see no benefit in reconsidering the current practices around surplus distribution.
Unionized workers know from experience that employers cost their required pension funding against compensation in general. Funds that go into our pensions are funds that do not go towards our wages or benefits. There is a fairly direct trade-off in practice. For this reason, unionized workers refer to pensions as deferred wages. As a result, workers have long held that they have a claim to the funds that go into the pension, regardless of whether the plan at any time has a funding surplus or deficit. Pension funds are our compensation funds.
This has been a particularly big issue since last summer's Supreme Court ruling in the Monsanto case, which held that when an Ontario-regulated defined benefit pension plan is even partially wound-up, a portion of the actuarial surplus must be distributed to plan members. In general, the courts have ruled that once funds are put into the pension, regardless of the funding situation, they in some sense belong to the plan. Accordingly, the courts have agreed that the surplus does not belong in principle solely to the sponsor, and that plan members have at least some claim to the surplus. The Steelworkers understand the Supreme Court decision to be clear and see no need to outmaneuver the basic assumption of the court by changing the policy framework now in order to have a different standard federally than in Ontario. Both jurisdictions should follow the same principles.
We find it inappropriate to ask whether the current surplus distribution rules act as a 'disincentive' to adequate funding. To do so would be to second-guess the court. Also, the amount of future retirement benefit owed to current unionized employees is determined as a result of collective bargaining. Once the agreement is ratified, the union's position is that the burden is on the employer to fund this future benefit. For us to engage in a debate now of what we as a union can do in order to give the employer a further incentive to follow-through on their contractual obligations is to second-guess our own bargaining.
Even if we were to engage in such second-guessing, we do not understand our rightful claim to the surplus in certain situations to be in any way a disincentive for the sponsor. One has to first side with sponsor (and against the unions, workers, and the court) on the question of asymmetry in order for the question of incentives to be even relevant.
Lastly, on the question of surplus distribution, we contest whether changing the distribution rules would positively affect funding levels in practice. It is unclear to the union that surplus distribution rules actually have been, or will be, the cause of pension plans failing. It is clear that reversing the Monsanto decision would make a bottom-line difference in favour of sponsors on partial wind-ups, and therefore it is clear why sponsors would push for this. But the notion that the current rules have actually changed funding decisions, especially when the majority of sponsors are already meeting only the minimum special payments and current service levels, seems rather hypothetical. It is not clear that changing distribution rules would have a concrete effect on either benefit security or plan viability.
The Steelworkers are not in favour of any of these changes that aim to increase the sponsors' claim on the surplus.
Funding Requirements and Guarantee Fund
As stated at the outset, our understanding of strengthening the pension framework is to ensure security and sustainability. There are a number of issues for discussion that look to relax the funding requirements. On one hand, our union gains nothing from overly rigid regulations, so we are willing to consider options that would give the sponsors more flexibility. On the other hand, most of the proposals involve the sponsor being able to put down less cash today. This increases the risk for plan members. This risk factor is the main barrier between plan members and acceptance of more flexible funding requirements. Employer groups try to persuade plan members to see it from the employer's position - that is, to believe that lower costs are good for business, which in the end are somehow good for everyone. But plan members are necessarily going to consider their own interests as workers and as future retirees. If the objective is to maintain the same future pension benefit payouts, it is hard to see how smaller payments in the short term by the sponsor make the overall funding target more achievable. Can the pension framework be strengthened simply by appeasing the employer's desire to cut sponsor costs? No.
The best way to pursue flexibility for the sponsor in a way that strengthens the pension framework, is to simultaneously counterbalance these changes by introducing a pension benefit guarantee fund (PBGF). A guarantee fund would absorb pension risk from plan members. With the safety that such a scenario would bring, plan members would be much more open to various options that relax funding requirements and provide sponsors with flexibility. A guarantee fund would help eliminate the risk factor for plan members.
Some specific suggestions for a potential federal pension benefit guarantee fund:
- that the size of the fund be proportional to the actual extent of underfunding of federally regulated pensions
- that maximum individual payouts be as high as $2750 per month
- that benefits be indexed to inflation
- that plan members who had access to unreduced early retirement under their original defined benefit plan not be subject to reductions under the PBGF
- that the PBGF be funded through a combination of sponsor premiums that include an additional risk-based premium for plans with unfunded liabilities (for example, an additional premium for plans with a funded ratio under 100%, even more if under 80%)
Some sponsor groups have opposed a PBGF as having not worked well in practice. The reasoning often provided is that many of these guarantee funds are financially insolvent, and that as a bail-out they create a disincentive for financially-troubled sponsors to fund their pensions. Our suggestions above speak to these criticisms: guarantee funds should be adequately funded, and risk-based premiums would counter any disincentives to fund pensions.
Furthermore, the Steelworkers will continue to push in other forums for the federal Workers First Bill. We have backed this from the outset. This bill would raise the priority for payment of workers' wages and pensions in bankrutpcy and CCAA proceedings. We believe workers should be paid first in such situations. If passed, this bill would further remove disincentives for financially-troubled employers to underfund their pension.
If a pension benefit guarantee fund were introduced, the union understands that workers would be protected against a certain degree of risk. This would make the union less hesitant to consider alternatives such as extending the amortization period from 5 to 10 years, or accepting letters of credit as pension assets in solvency valuations. (Although the union does note that the question of whether letters of credit can be considered pension assets is still up in the air. On the one hand, the recent passage of Bill 102 in Quebec makes that province the first to permit the use of a letter of credit to guarantee a solvency deficiency. On the other hand, the BC Court of Appeal this June upheld a ruling that rejected the use of a letter of credit from a chartered bank to make up a pension plan solvency deficiency.)
A related issue for discussion raised by the consultation paper is whether financially vulnerable sponsors should be released from the obligation to pay into the plan, upon its termination, the amount necessary to provide full benefits promised to members as of the date of termination. Our position is that financially vulnerable sponsors should not operate under different rules.
Cancel Benefits Rather Than Fund Them
One of the issues for discussion is whether to introduce a provision by which the PBSA could void plan amendments that reduce the plan's solvency ratio below 85%. The Steelworkers are against this plan in general, and against the rate of 85% in particular. It is so high as to make too many amendments subject to being voided. But the union opposes this plan in general because it would effectively undo the results of collective bargaining in certain cases. Further, employers who entered into bargaining with a poorly funded pension, deliberately or not, would in effect escape having to negotiate pension improvements. The union does not believe that regulations that threaten the power of collective bargaining are a productive way to regulate the sponsor's funding of obligations to its members.
Another issue for discussion is whether pension plans with deficits upon termination should give lower priority to plan improvements made in the last five years. Again, the Steelworkers oppose this plan in general because it would undermine the collective bargaining process. But in the case that such a plan were to be implemented, the Steelworkers would argue that 5 years is an excessive amount of time to have to wait for pension plan improvements to be given equal priority with pre-existing benefits.
Disclosure of Funding Information
The Union agrees that greater disclosure of funding information to plan members would be beneficial. Plan members should be kept up to date on the size of the fund's solvency and on-going assets and liabilities, as well as the fund's solvency ratio. Members should also be aware of the fund's current cost, how any existing surplus will be used by the fund, and the extent of any contribution holidays taken.
The Steelworkers are thankful to be invited to participate in this open call for consultation. Protecting pensions is a very high priority for our union. The positions outlined in this submission are in keeping with the Steelworker goal of protecting the security of defined benefit pensions. They are also in keeping with our understanding of what viability should mean when it comes to everyone's interest in defined benefit pension plans.
The Steelworkers are not in favour of:
- changing surplus distribution rules
- creating special solvency payment accounts
- voiding plan amendments that reduce the plan's solvency ratio below 85%
- 5 years of lowered priority on plan improvements if plan terminated
The Steelworkers are in favour of:
- a federal Pension Benefit Guarantee Fund
- fuller disclosure of funding information
- requiring surplus distribution on partial terminations
- requiring full funding on termination, regardless of financial status of sponsor
Provided that the federal PBGF were put in place, the Steelworkers would be open to further consideration of:
- letters of credit
- extending the solvency amortization period from 5 to 10 years