Retirement dreams under siege

TheGlobeandMail.com – Retirement dreams under siege – Part one: The crisis.  Canada’s aging work force hasn’t saved enough to retire. Pension benefits are being slashed, employees are working longer, the elderly are selling their homes and going back to work
Published on Friday, Oct. 16, 2009.  Last updated on Monday, Oct. 19, 2009.  Jacquie McNish

Pensions: What you need to know

* 84% of public service workers have pensions.
* 78% of these plans are gold plated defined benefit pensions
* 25% of private sector workers have a pension plan
* 16% of these plans are gold plated defined benefit pensions
* 11 million workers, or 60 per cent, of Canada’s workers have no pension at all
* 8 million or 45 per cent, have no pensions or registered retirement savings plans (RRSPs)

Charles Walker spent his summer overseeing the death of 1,167 retirement dreams.

After 22 years as vice-president of finance at a perennially struggling aluminum mill in Cap-de-la-Madeleine, northeast of Montreal, Mr. Walker was accustomed to tough assignments. But nothing prepared the retiree for his comeback task: assessing the health of the mill’s three pension plans after the company was forced into liquidation proceedings in March by its bankrupt Ohio parent, Aleris International Inc.

For three sweltering months, Mr. Walker, 65, toiled in the mill’s abandoned, airless offices, making calculation after calculation. His final tally: $46.2-million of pension deficits.

That tab, he estimates, will erase between 30 and 40 per cent of the pensions owed to him and his fellow retirees and employees. “I felt like I was in a morgue,” Mr. Walker says.

“You look at this and you say, ‘Jesus, this is painful’ … I know people in the plant, I know their families. So it is very, very agonizing to see these people who have worked all their life to try and get a pension – and, all of a sudden, it falls apart.”
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Tools you can use

Retirement savings calculator

Do you know what it takes to create a secure retirement? Use this calculator to help create your retirement plan

< http://www.theglobeandmail.com/pages/retirementplan/ >.

How pension plans stack up

An interactive explainer breaking down the different kinds of pension plans and the payouts depending on income and age of retirement

< http://www.theglobeandmail.com/report-on-business/retirement/how-pension-plans-stack-up/article1322924/ >.

Understanding complex pension terms

Use our glossary to find explanations of key terms related to retirement and pensions

< http://www.theglobeandmail.com/report-on-business/retirement/whats-a-cbca-an-fae5-or-a-401k/article1306766/ >.
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Canadians are facing a national pension meltdown. Decades in the making, it has worsened dramatically during the recession. Businesses are shredding pension promises, retirement savings are shrinking, employees are working longer and the elderly are selling homes and returning to the workforce. As the retirement dream fades, policymakers seem unwilling to tell Canadians they have not saved enough to retire.

“We have overestimated our capacity to protect the needs of retirees,” says Harry Arthurs, former head of an Ontario commission that identified numerous flaws in the province’s pension regime.

“We now know there is no such thing as a pension or retirement promise,” Mr. Arthurs says. “There is no certainty.”

A slow retreat by companies from their pension obligations turned into a gallop this year after a severe global recession laid bare the frailties of the promises made to employees. The withdrawal is major factor behind a startling statistic: Eleven million Canadian workers, about 60 per cent of the work force, do not have a pension plan.

Those corporate pension plans left standing also face unprecedented stresses. Market turmoil has punched an estimated $50-billion deficit hole into Canada’s corporate pension funds, according to experts who have crunched what little current data is available.

The cost of replenishing the deficit is squeezing businesses when they can least afford it. Pension costs are spiralling as retirees live longer and the baby boom generation heads for the exits: More than 40 per cent of workers will reach retirement age over the next two decades.

A crisis this large isn’t just financial. It’s also tearing the fabric of Canadian society. Retirement anxiety is changing our notion of personal wealth. Where once a house and two cars were symbols of success, today the measure is more likely to be the size of your nest egg. And as with any wealth metric, there is a class system. At the top of the system is a shrinking royalty. The majority of them are public servants: About 84 per cent of public-sector workers are pension plan members, most of whom have gold-plated pensions designed to guarantee retirees fixed incomes.

At the bottom are the pension paupers, the millions of workers who never had an employee retirement plan – and whose taxes contribute to public-sector pensions that they can only dream about.

Apart from fraying Canada’s social fabric, the growing ranks of pension wounded pose long-term challenges for an economy that depends on consumer spending. Aleris’s Mr. Walker, who stands to lose 40 per cent of his pension income, plans to survive by simply spending less.

While the casualties mount, businesses are stepping up their lobbying of federal and provincial governments for more latitude to ease pension burdens. “Existing deficit funding rules may threaten the sustainability of many Canadian companies and ultimately the pensions of their retirees and employees,” Calin Rovinescu, chief executive officer of Air Canada, told The Globe and Mail.

In July of this year, the airline won a special 21-month reprieve from its employees and the federal government to delay repairing its $2.9-billion pension deficit. It is one of seven companies lobbying Ottawa to allow businesses more time and discretion to replenish pension deficits.

Federal and provincial governments, which divide responsibility for pension regulation, have responded to the pension crisis by granting businesses like Air Canada extra breathing room to replenish underfunded pensions. But these measures are little more than Band-Aids applied to a critically injured system. No policy maker seems willing to admit that the corporate pension promise is broken and Canadians need to save more to survive retirement.

While governments watch from the sidelines, bankruptcy courts have become the de facto policy maker. The fate of thousands of elderly workers and retirees is being decided in court-supervised restructurings.

The narrow lens of the commercial court judges has produced some recent decisions that have weakened employees’ pension rights.

“No one is doing anything for us,” says LeRoy Pickett, a 67-year-old retiree. When his employer of 39 years, Slater Steel Inc., declared bankruptcy in 2003, he lost nearly 30 per cent of his pension. His wife had to return to work and the couple were forced to sell their house in Hamilton. “It makes you feel like a horse being sent to the glue factory after a long time of work,” Mr. Pickett says.

Video: LeRoy’s story:

‘We wanted to travel… You want to be able to enjoy your grandchildren, you want to take trips…’
< http://www.theglobeandmail.com/report-on-business/retirement/meet-leroy-pickett-67/article1324810/ >.

Disaster long in the making

The surprising thing about Canada’s pension crisis is that it has caught anyone by surprise. Like a volcano that has been spewing ominous clouds for years, the crisis was foretold for years by countless academics, consultants and government panels. Four provinces – British Columbia, Alberta, Ontario and Nova Scotia – have recently had commissions report on pension woes. To the same end, Ottawa has created a joint federal-provincial task force that will report in December.

For all this seeming attention, however, there has been little meaningful change in the country’s fragmented pension regime for nearly two decades.

“Our politicians don’t want to talk about this. They always hope that someone else will deal with it,” says Claude Lamoureux, former head of Ontario Teachers’ Pension Fund, one of the country’s largest public-sector pension pools.

The crisis is making for some unlikely rebels. Next week Oct. 21 Nortel Networks Corp.’s highly organized fraternity of 11,000 retirees is demonstrating on Parliament Hill, two weeks after similar rally at Queens Park. Among the leaders is Robert Ferchat, a former president of Nortel Canada, who retired in 1991 and saw his pension cheques frozen after Nortel’s collapse. He never imagined he would one day march arm-in-arm with union leaders.

“When I worked at Northern Telecom, it was king of the world,” he says. “Today its pensioners are victims of years of mistakes and bad luck. It is outrageous to me that during this time executive compensation rose dramatically, while pensioners became more vulnerable.”

“ We tended to think this was tomorrow’s problem, but tomorrow’s problem is here today.”

Some workers have been able to ease the sting of lost pension income with savings invested in registered retirement savings plans (RRSPs). But workers with company pensions can only take limited advantage of the tax break on RRSP contributions. Stock market volatility and high management fees on many popular retirement funds also point to the drawbacks of these investments.

“It turns out the private savings in RRSPs were not as good as we thought it would be, because those that did save have been hurt,” says Bob Brooks, recently retired vice-chairman with Bank of Nova Scotia.

Historians believe that Hudson’s Bay Co. pioneered Canada’s first pension plan in the 1840s as an incentive to lure managers to desolate trading posts. Soon, rapidly growing railroads, banks and department stores were dangling pensions to cement the loyalty of the skilled workers they badly needed for expanding empires.

The history of a pension crisis:

Pension plans have been offered in Canada since the 1800s, but have been declining in the private sector in recent decades. Check out an interactive summary of the evolution

< http://www.theglobeandmail.com/report-on-business/retirement/the-history-of-a-pension-crisis/article1322961/ >.

The genius of these early plans was that costs were minimal. Only a lucky few employees would live long enough to collect benefits – up until 1950, the average Canadian life expectancy was under 65. Ottawa joined the pension movement in 1927 with a plan that helped provinces ensure every Canadian over 70 would receive $20 a month.

As the economy grew and prospered after the Second World War, pensions came to be seen as a worker’s birthright. The federal government’s Old Age Security program and Canada Pension Plan, as well as the Quebec Pension Plan, were created to ensure that no retired employee fell below the poverty line.

Supplementing these Spartan plans were increasingly rich company pensions that promised a comfortable retirement.

By 1977, 46 per cent of the work force was enrolled in employment pension plans. The public/private split was already clear: 75 per cent of public-sector workers were registered in plans, compared with 35 per cent in the private sector, according to Statistics Canada.

Since then, the pension blanket has slowly unravelled. Core manufacturing sponsors transferred operations to lower-wage countries or switched to cheaper defined-contribution plans. By 2007 this shift was so pronounced that the percentage of companies offering defined benefits had dropped by half, to 15.7 per cent. And by that year, 84 per cent of public-sector workers had rock-solid defined benefit plans.

By 1977, 46 per cent of the work force was enrolled in employment pension plans. The public/private split was already clear: 75 per cent of public-sector workers were registered in plans, compared with 35 per cent in the private sector, according to Statistics Canada.

The heady returns led to a complacency that blinded workers, employers and governments to the fault lines. During these good times, some businesses siphoned off a portion of pension surpluses while others took pension contribution holidays – in part because Canada’s tax laws penalize companies that plow extra savings into plans. Adding to the environment of complacency was the unchecked optimism of actuaries, the gatekeepers who are required by law to test the solvency of pension funds. As markets inflated, actuaries continued to assume that abnormal investment gains would deliver sufficient returns over the long term to cover rising pension costs.

“We tended to think this was tomorrow’s problem, but tomorrow’s problem is here today,” says Mr. Lamoureux.

“ We are witnessing an unprecedented pension crisis. It’s going to get a whole lot worse. ”— Corporate pension litigator Brett Ledger

The breaking point

The crisis erupted with a bang last fall when the global financial meltdown knocked the stuffing out of pension portfolios and retirement savings. Almost overnight, the rosy investment forecasts of actuaries and pension managers began to look delusional.

Taking the pulse of corporate pension plans is no easy matter in Canada. Pension oversight is divided among federal and provincial regulators that rely on outdated data to monitor pension fund health.

Typically, pension funds are subject to actuarial assessments of their solvency only every three years. Thus the full impact of the market collapse will not be known at many funds for several months.

Still, a number of pension experts have made some educated guesses about the hit that funds have taken. RBC Dexia, a pension services company, estimates major Canadian pension plans – those with more than $1-billion of assets – saw assets swoon by an average of more than 18 per cent last year.

The carnage was particularly gruesome in the private sector, where pension managers are significantly less experienced than their public-sector counterparts. “The pension burden has proven to be too great,” says Ian Markham, a director with pension consultant Watson Wyatt Worldwide, who estimates the average Canadian corporate plan is 20 per cent short of the assets it needs to fund its long-term pension obligations. That deficit adds up to about $50-billion, a staggering IOU that is crippling a number of companies.

“ Bankruptcy court … is not the right place to make social policy. ”— Murray Gold, an adviser to Ontario’s Arthurs commission

The overall impact of the recession has forced a record number of Canadian companies to liquidate or restructure their operations. Hidden behind these bankruptcy statistics are a growing number of crippled companies with pension deficits.

Again, there is no precise current data, but pension professionals say they have never seen so many companies land in bankruptcy proceedings with broken pensions.

“We are witnessing an unprecedented pension crisis,” says Brett Ledger, a corporate pension litigator with Osler Hoskin & Harcourt LLP. “It’s going to get a whole lot worse,” he predicts, because another wave of struggling companies is drawing closer to bankruptcy.

It is in these proceedings that the worst of Canada’s pension flaws are revealed. Many retirees and employees have no idea that their pension funds have deficits until their companies land in court. Several former workers at Slater Steel only learned the company was in bankruptcy proceedings in 2003 when their pharmacists informed them that their benefits had been cut off.

There are so few warning signs because actuarial check-ups are so infrequent. But even these infrequent analyses, experts warn, can be subjective and sometimes very wrong.

In early 2002, only a few months before Slater Steel filed for bankruptcy protection, two pension funds at subsidiary Slater Stainless Corp. received a stamp of approval from Melvin Norton, a veteran actuary with Aon Consulting Inc. The Ontario Superintendent of Financial Services, the province’s pension regulator, later concluded the funds were in fact 40-per-cent underfunded. It sued Mr. Norton for allegedly filing a false actuarial report.

The charges against Mr. Norton were dismissed by an Ontario judge. In 2008, the Canadian Institute of Actuaries fined Mr. Norton $15,000 and placed him under supervision for six months after it found that he had failed to perform professional services with “skill and care.”

Mr. Norton says he was not responsible for the pensioners’ losses. “It was the fact that the company didn’t put enough money in the plan.”

“We need an early-warning system,” says Mr. Arthurs, who headed the Ontario commission. “There is a wide zone of discretion left to actuaries who are making judgments about the health of pensions.”

Justice can seem selective for pensioners whose funds become entangled in bankruptcy proceedings.

In court, however, workers, unions and even pension regulators have been locked in losing battles against creditors. In two recent cases, creditors offering new financing have successfully demanded that the courts suspend payments owed to repair pension deficits.

“ This is a dream buster …. People have really been caught short.”

By trumping pension laws, the judges in these cases are seeking to strike a reasonable commercial solution that can help the companies survive and possibly one day prosper sufficiently to repair ailing pensions. But these decisions come with risks. If restructuring efforts fail and company assets are liquidated, pensioners have little hope of recouping owed pensions, because they are outranked by most other creditors.

“Everyone feels like a victim here,” says Carol Kirton, 52, who has worked for 32 years at one of the companies – the Port Hope, Ont.-based branch plant of U.S. auto parts maker Collins & Aikman Corp.

Ms. Kirton says company officials have disclosed that the pension has a 30-per-cent shortfall. After two years of bankruptcy protection, she says hope is fading that the company will survive.

Concerns are rising among labour groups and their legal advisers that bankruptcy proceedings are becoming a place were companies can too easily amputate their infected pensions.

“Bankruptcy, or the threat of bankruptcy, is being used to eviscerate pension funding,” says Murray Gold, an adviser to Ontario’s Arthurs commission and a Koskie Minsky LLP lawyer who specializes in representing labour groups. “Bankruptcy court … is not the right place to make social policy.”

Video: John’s story:

Learn why former Nortel manager John Mlacak may have to talk to his children about borrowing money.

< http://www.theglobeandmail.com/report-on-business/retirement/retirement-lost-john-mlacak-73/article1324809/ >.

Attention must be paid

There are other places besides bankruptcy court to reform a damaged pension regime. But these court room tug-of-wars will likely continue until governments, businesses and workers adopt what former Ontario pension commissioner Mr. Arthurs calls “a new mindset.” That new approach would recognize that battles over shrinking corporate pension plans have, at best, only fixed the system at the margins and, at worst, delayed momentum for change.

Turning the Band-Aid solutions into a blanket fix for Canadian retirees would require Ottawa and the provinces to take a difficult and politically unattractive first step: Recognizing that the century-old business promise of a comfortable retirement is vanishing like the trading companies, retailers and railroads that first introduced them. Until that happens courts will continue to be the graveyards of broken retirement dreams.

Just ask Mr. Walker, the former Aleris executive. “This is a dream buster …. People have really been caught short.”

With files from reporter Greg Keenan        

< http://www.theglobeandmail.com/report-on-business/retirement/retirement-dreams-under-siege/article1327536/ >.

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