The Decline of the Defined Benefit Pension Plan

The defined benefit pension plan ("DBP") is becoming an endangered species in Canada. In 1977, 48.4% of working men had a defined-benefit pension plan; in 2011, that had dropped to 25.4%. The decline was less dramatic among women, though the percentage started out lower - 34.% of women had a DBP in 1977, which fell to 31.1% in 2011. The fact that more women than men now have DBPs is related to the decline of employment in heavy industry and manufacturing in the private sector, and the generally strong representation of women in the public sector. However, the future even of the previously-sacrosanct public sector defined benefit pension seems to be in question.

As I noted last time, the City of Saskatoon has moved away from a traditional defined benefit plan - one where the employer is ultimately responsible for the pension benefits of retired employees - to a plan with a "cap" on employer and employee contributions. (The ATU has described this as a "defined target" plan; as I mentioned last time, I'm not sure labels matter, but there's no question the changes to the City pension plan are a move away from what has traditionally been described as "defined benefit". It's probably safe to call the new City plan a "defined target" plan. If you don't feel like wandering through my last post, here is a link with some admittedly brief definitions of the different kinds of plans.)

There also appears to be an outstanding grievance filed by ATU regarding the pension plan changes. The Union's offer to settle includes (unsurprisingly) that if the ATU's grievance is successful, then the City would remain responsible for making up any shortfall in the City pension plan. If the grievance fails, then the ATU would, more or less, accept the City's offer regarding the pension plan.

In the meantime, the ATU has commenced an overtime ban to put pressure on the City to settle. We'll have to see how the City responds. A lockout, or partial lockout, may be a possibility; so might a simple "wait-and-see" approach. We'll also have to see where the blame lands - who the public holds accountable for the service disruptions.

And it's been four years since the last contract expired. It appears that defined benefit plans have recovered somewhat since 2012 - see for example this 2014 presentation by the Financial and Consumer Affairs Authority on the recovery of defined benefit plans, or this 2013 article at Benefits Canada. That said, it's possible that part of that recovery is due to increased member contribution rates - and certainly, that's the position the City has taken regarding its pension plan (i.e. that the relative health of the plan now is due to the now-increased contribution rates).

But the City of Saskatoon, obviously, isn't the only employer seeking changes to its defined benefit pension plan. Indeed, the changes the City is seeking are relatively modest, compared to what's going on in other industries. The City of Saskatoon, to be clear, isn't moving to a "defined contribution" plan, nor is it seeking to implement a two-tiered benefit scheme. Therefore, most of what follows is about the general context across Canada - not about the City of Saskatoon specifically.

But when taken in that broader context, perhaps ATU's reluctance to accept changes to the City pension plan makes more sense. That doesn't automatically make them right, and  it doesn't mean that their resistance will yield the results they want. But it might make the union's position more understandable.

"Defined benefit" pension plans are one of the current battlegrounds for labour, as unions struggle to maintain existing plans, and employers pursue strategies to change from "defined benefit" to either "defined contribution" or "defined target" pension plans. We saw that in the public sector  last summer in the Canada Post negotiations and threatened lockout (where the employer eventually backed down on that issue).

Defined benefit plans are not without their critics, of course. See here for Prof. Michael Armstrong's op-ed on the risks of DBPs - for instance, they're at risk if an employer goes bankrupt, and they tend to penalize workers who change jobs.

In the private sector, the the last round of bargaining (in 2012) between Canadian auto workers and their employers saw the introduction of a "hybrid plan" which had some elements of defined benefit and some of defined contribution.  In the latest (2016) round, even that seems to have been negotiated away for new hires in the agreements struck between UNIFOR and General Motors, Ford Canada, and Fiat Chrysler.  The existing plan would continue to apply to existing employees, but new hires in the Big Three's Canadian operations would seem to move to a strictly "defined contribution" model - introducing a more stark "two-tiered" model (where newer, younger workers are paid on a lower wage scale, and get fewer/lower benefits, than more senior, older workers).

The defined contribution model involves employees and employers both paying into the plan at set rates, but as with an RRSP, a defined contribution plan's payout is dependent on the market. In other words, there's no guaranteed monthly payment upon retirement, unlike in a defined benefit plan. There's much less security here for the retiree, but also no ongoing risk for the employer. Hence, there is a strong move afoot among many employers to shift from a defined benefit plan (where they must guarantee, wholly or in part, the pension payments) to defined contribution plans (where the risk falls upon the employee).

Sometimes this is pursued wholesale; often, an employer with an existing plan will retain the defined benefit plan for existing workers, but will seek to implement a defined contribution plan for new workers (as with the UNIFOR/GM deal, among many others). 

Such changes aren't universally welcomed, of course. In the UNIFOR/GM deal, for instance, the vote by GM workers to accept the new contract - which, in fairness, also guaranteed continued investment in Canadian plants - was successful with a relatively anemic majority of 64.7%. At Fiat Chrysler support was a bit stronger, with 70.1% of workers voting to accept the new contract. Meanwhile at Ford Canada, the deal barely passed with approximately 58% of workers voting to accept. But the contracts were ratified nonetheless; and when the Big Three auto manufacturers, who have historically been part of the "gold standard" for workplace pensions and benefits in the private sector, move away from a defined benefit plan, it's a signal that other plans aren't safe.

The public sector isn't immune to such changes, either. The pension issue is almost certainly going to rear its head at Canada Post in the next couple of years. The federal government has recently introduced legislation that would allow for "defined target" plans; PSAC, at least, has described this move as an "attack" on pensions.

(This is under the leadership of Finance Minister Bill Morneau - the same Bill Morneau, of course, who was a principal of one of Canada's leading human resources consulting firms; who told workers that they should just "get used to" short-term employment; and whose own defined benefit MP pension, provided he's re-elected, seems to be doing just fine, thankyouverymuch.)

Meanwhile other employers - like the City of Saskatoon - in both the private and public sector are seeking to impose caps on employer contributions to a plan. As I mentioned in my last post, that leaves open the possibility of reduced pension benefits for retirees if the plan under-performs. At the same time, the public sector does have a different dynamic than, say, the auto makers, because it's the taxpayers who ultimately are on the hook (though private employers will tend to pass on costs, such as increased pension contributions, to their customers, too).


Unions are often criticized when they agree to move from a defined benefit to defined contribution  or defined target plan. Regarding the recent deal between UNIFOR and GM, see here for a general criticism of "concession bargaining" and two-tiered wage and pension structures , here for a more academic Q&A between Andrew Langille and Michael Mac Neil on the issue of two-tiered entitlement schemes, and finally here where the UNIFOR/GM deal is called a "stake through the heart" of company pensions. UNIFOR, in fairness, says that the GM deal (and the others) secures jobs and investment in Canadian plants. Notably, nobody seems to be going after the employers overmuch for aggressively pushing these changes - perhaps because we simply expect employers to act in this manner.

In any event, whether you agree or disagree with ATU's stance, and whether or not the ATU members get what they want in this contract negotiation, it might make more sense when considered in the broader national context - as part of the overall struggle by unions against the decline of the defined benefit pension.

Saskatoon Transit: Pension Palaver

Three weeks ago, Amalgamated Transit Workers Local 615 - which represents transit workers for the city of Saskatoon - served the City with the statutory 48 hours' notice of strike action, as required by The Saskatchewan Employment Act. It seems only right that, since this blog started with the Saskatoon Transit Lockout of '14, it continue with the Saskatoon Transit Strike of '16.

...Except there's no strike, yet. While the ATU is now in legal strike position, it appears that bargaining between the Union and the city is reconvening on October 11th, (tomorrow!) and that there will be no job action taken until then. If bargaining doesn't go well, it's possible that the ATU will take job action other than complete withdrawal of services, such as transit employees refusing to wear their uniforms (as they did back in March), a ban on working overtime, rotating strikes, and so on - though a full-on withdrawal of services would be legal, and a possibility.

Bus Riders of Saskatoon, a local group that "advocates for better public transit in our city,"  hopes that the parties can come to an agreement.  I recently opined that this disagreement between the City and ATU may be difficult to resolve without a strike or lockout, but (as a citizen, taxpayer, transit user, labour law wonk, union member, and all-around nice guy) I hope that the City and the Union can come to an agreement and prove me wrong.

...within reason.

 

The main barrier to reaching an agreement, according to both sides, is the proposed changes to the City's pension plan (which I'll refer to as "the Plan"). There are, of course, any number of issues that must be dealt with in collective bargaining; but both sides seem pretty clear that the pension changes are what's stopping them from reaching a deal.

[Caveat: Before I go any further, I'll note that all of what follows is based on public statements and documents from the City and from the ATU. I haven't spoken to anyone from either side, nor do I have any particular knowledge of what's going on behind closed doors or at the bargaining table.]

For what it's worth, the City's final offer regarding wages - 10% total over four years - seems to be in the ballpark for public sector unions in Saskatchewan. In their most recent round of bargaining, Saskatoon employees represented by CUPE Local 59 accepted the same offer - 10% over four years;  Saskatoon firefighters bargained, in total, a 20% increase over six years; Saskatoon police bargained wage increases of 11% over three years; and Regina Transit negotiated a wage increase of 6% over three years with its workers.


 

There's been some argument over whether the change amounts to turning the plan from "defined benefit" plan into a "defined target" plan, but I'm not sure that labels or definitions really matter in this scenario. ("A rose by any other name..." and all that.) If you're interested, here's a quick set of definitions of each type of pension plan, from the Globe & Mail back in 2014, when the federal government was seeking to shift some public employees' pensions from a defined benefit plan to a defined target plan.

But the problem here - labels notwithstanding - is, simply, that the City and the ATU don't accept each others' numbers. They don't agree on whether the Plan has to change and, in particular, on whether a "contribution cap" is the kind of change needed.

The City's position is that the City of Saskatoon General Superannuation Plan - i.e. the pension plan for all City employees who aren't covered by the police or firefighters' pension plan - needs to be changed to protect the Plan's long-term health. Changes include an increase to the percentage of an employee's earnings that are contributed to the plan, an increase to the retirement age, and a cap on the City's "administration fees" (i.e. those fees relating directly to the City's costs of administering the plan).  Every other municipal union involved in the plan has signed on to the changes, except ATU, and the City isn't willing to carve out an exception for transit workers.

The Union's position is that the pension plan is in good shape, that the City has provided incorrect or misleading information regarding the health of the plan (and, by implication, that the other municipal unions have accepted a bad deal) to justify changes that aren't required, and that there are other ways to deal with the Plan.

ATU says it has an actuarial report that backs up its position. The City, meanwhile, responds that the Union's report is operating with the benefit of hindsight - that the Plan is in good shape now because of the changes agreed to by the other unions.

[Another caveat: I am not an actuary, nor an expert on pension law, and so I am in no position to judge on whether the City or the Union - or both, or neither - is correct on whether the pension changes are necessary for the long-term health of the pension plan.]  

Right, so. The main issue here, as far as ATU is concerned, is that the new language puts a "cap" on contributions to the plan. That means that, bluntly, if the Plan performs badly in the future, pension benefits might be reduced. Other changes (such as the increase in retirement age) seem to be less controversial - or, at least, has not been the focus of ATU's criticisms.

The language that the ATU apparently takes issue with is found at p. 14 of the City's final offer. (The actuarial report commissioned by the Union, which questions the City's financial statements, is available online, here.  The actual changes to the pension plan that the City seeks are found in the City's final offer to the Union, on pp. 12-15. And the pension plan itself, including many of the changes agreed to by other City unions but not by ATU, is here (Article 1.04(10) summarizes the changes stemming from the last round of bargaining.)

On a very basic level: Under the Plan, each employee contributes a percentage of his or her "earnings" to the Plan. The City matches that contribution. When an employee retires, he or she gets a monthly pension payment from the Plan's fund.

Prior to the last round of bargaining, if the Plan performed poorly and the fund couldn't pay retirees' pensions, either the City and its unions would have to negotiate increased contribution rates, or the City (and therefore taxpayers) would have to step in to make up the shortfall. Under the new language, contributions are "capped" at 9.0% of earnings (they're currently at 8.8% - see Art. 4.01 of the Plan). If the Plan performs so badly in future that it can't fund pension payments even after an increase in contribution rate to 9.0%, then benefits will have to be cut - since the parties have agreed not to increase contributions any higher. (See p. 14 of the City's final offer.)

(The contribution rate can increase to as high as 9.5% temporarily, but that can only last for up to six years, and the overall "target" of the plan is to have a maximum contribution rate of 9.0%. In any event, that doesn't seem to be an immediate risk.)

 That's one sticking point for the ATU. There's another: if the City and its unions can't agree on what benefit reduction is required, then an arbitrator will be appointed, will review submissions from all involved, and then make a decision on what is required to keep the plan solvent at a 9.0% contribution rate. So, whether by negotiation, or by a binding decision by a third party arbitrator, the 9.0% cap will be enforced.

The changes wouldn't seem to affect those who have already retired, or those who retire prior to the changes being made - the proposal states that any such changes to benefits would fall upon future service, and Section 14.01(1) of the Plan sets out that changes to the Plan, unless otherwise specified, only affect retirements on or after the date of the change. But it looks like the proposed changes could affect those who retire after the change is implemented (as you would expect - otherwise what would be the point of the changes?).

Now, to be clear: nobody is going to lose their pension. And the changes aren't anywhere near as stark a difference as moving from a "defined benefit" plan (where the employer is usually on the hook to make up any shortfalls in the fund) to a "defined contribution plan" (where the fund operates much like an RRSP - both parties pay in, but there's no guaranteed payout upon retirement). Retirees will still get whatever level of pension benefit would be sustainable at a contribution rate of 9.0%, in the long term. And there's no suggestion at this point that there's any immediate risk of contribution rates having to increase from their current levels.

(There's nothing saying the Plan can't be further amended in the future, either. But of course it's harder to bargain away from a contribution cap once a cap has been agreed to.)




Both sides face challenges here. One, if the City concedes and carves out a pension deal for ATU - one different from what the other city unions have accepted - it will almost certainly lead to labour relations problems. Either: the other unions agree (as they seem to) that the Plan changes are necessary, and will have real concerns about one union, ATU, not "pulling its weight" in funding the Plan; or, the other unions (or their members) will feel that they got a bad deal in bargaining, and will demand the same deal as ATU next time around. For a sizeable employer like the City, with multiple unions and bargaining units to deal with, neither option is a good one. From the City's perspective, a different deal for ATU is likely a non-starter.

Two, the Union has taken a vocal, public, and uncompromising stand against the pension changes.  ATU membership seems to be behind its leadership (of those ATU members who voted, 92 per cent voted not to even consider the City's offer). This makes it difficult for the ATU bargaining committee to compromise on this issue and, specifically, to accept the same deal as the other city unions. The ATU's press releases have suggested that it's proposed alternatives, but those don't seem to be available online - and are probably moot in any event since, as I mentioned above, the City isn't going to want to have a different deal for ATU.

(...Given the current election, I'm also skeptical that any mayoral candidate or City Council candidate has "the answer" to this dispute, by the way.)



So - to bring this to a conclusion - nobody disputes that the City's proposal contemplates that pension benefits might be reduced sometime in the future, or that contributions might increase (slightly) from their current level.

But the City insists the specific changes it's put forward are necessary for the long-term health of the Plan, and it's entirely understandable that the City is reluctant to carve out an exception for transit workers when every other municipal union covered by the Plan has agreed to the changes.

The ATU, meanwhile, appears convinced the City is either wrong or, worse, lying about the numbers, and that the changes aren't necessary, and has taken a strong stance against the proposed changes.

And when you have entrenched, seemingly irreconcilable positions, that makes it difficult - but not impossible - to conclude a deal.