Pensions 101: From Workplace Plans to CPP

The Bombardier strike in Thunder Bay by 900 Unifor members has been sparked by yet another attempt by a profitable corporation to rollback the pensions of workers, specifically future hires. In the interest of providing readers a thorough understanding of the various types of pensions, RankandFile.ca`s Doug Nesbitt conducted this extended interview with Kevin Skerrett, pensions researcher for the Canadian Union of Public Employees.

RANKANDFILE.CA: Bombardier wants new hires at Thunder Bay to accept “defined-contribution pensions”. Current employees have a “defined benefit” pension plan. What is the difference between the two?

In many ways, a “defined benefit” (or DB) plan is a real pension plan that does what most of us think a pension does: it promises to pay workers a specific amount of pension on retirement, usually calculated as a percentage or proportion of the wages that an individual worker was earning near the end of their active work life.  In this way their pension benefit is “defined”, and is secure because either the employer or a combination of the employer and the workers, are committed to making additional contributions to the plan in order to ensure that there is always enough assets to keep its promises.  That security was actually entrenched in law, over the years, so that promised (DB) pension benefits were actually a legal obligation, making it illegal to reduce any pension benefits that have been earned (by active workers) or are already being paid (to retirees).  In that sense, DB pensions are designed to be fundamentally secure – though to some extent dependent on the solvency and viability of the employer that is backing them.

“Because there are no promised pension benefits in defined contribution plans, the plans can never be “underfunded”, so employers never face any obligation to contribute additional amounts — which is a key reason these schemes are so popular with employers and governments”

A “defined contribution” (or DC) pension plan is nothing like this.  In these arrangements, which have really only become a serious competitor to DB plans in the neoliberal period after 1979, there is no promised level of benefit, and no security at all to what plan members will receive as “pension”.  It is far more accurate to view DC plans as individual savings schemes in which all investment and other risks have been transferred from the employer to the individual plan members – much like an RRSP, which some of us are familiar with.  Because there are no promised pension benefits in DC plans, the plans can never be “underfunded”, so employers never face any obligation to contribute additional amounts — which is a key reason these schemes are so popular with employers and governments.  It’s worth mentioning that they are also popular with the big insurance companies, banks, and other private for-profit institutions that administer and invest these plans and funds.

A large majority (around 80%) of workers who have a pension plan have a DB plan, but that figure has been in a long term gradual decline, mostly as a result of private sector employers switching over to DC.  As of today, just over half of pension plan members are public sector workers, and just under half work in the private sector.

RANKANDFILE.CA: This is the second strike at the Bombardier plant since 2011, but only the third since the early 1980s. These past two strikes have been over pensions. There have also been long strikes or lockouts over pensions, such as Vale-Inco in Sudbury and Electro-Motive Diesel in London. Why are companies going after pensions so aggressively?

This is true, and in fact, we can see statistically that a key story of the past 15 years or so of labour relations (and disputes) has been an accelerating attack on decent and secure (i.e. Defined Benefit) pension plans.  Looking even further back historically, what we see is that in North America, workers and their organizations (including both unions and political parties) fought initially for decent and adequate public pensions for all workers.  These pressures were resisted, in particular, by capitalist financial institutions (banks, insurance companies, etc) that viewed retirement income as something that could be commodified – by them – and that should be kept in the private sphere.  This private model included “securing” pension promises by pre-funding benefits in pooled investment funds that would be invested in financial markets (stocks and bonds, etc).  The result in both the US and Canada was a retirement system that included very weak and stingy public pension systems and a large space for private workplace based and individual “supplementary” pensions.

“a “two-tier pension is a classic divide and conquer approach…Over time, the growing portion of younger workers will realize that they’ve been “sold out” by their own union…such divisions in a union membership will be easily exploited by employers who will be able to play one generation off against another”

For several decades in the post-war period, decent workplace pensions did get established on this private basis within workplaces that had either strong unions or layers of workers who had individual or social bargaining power or prestige.  So, many large manufacturing firms established decent pensions, and so did most public sector employers.  But this initial success was highly dependent on some sort of bargaining power – meaning that the majority of North American workers with no union and no other leverage never had the power to insist on pension provision.

When the serious economic crises of the 1970s hit, the momentum for extending pension coverage slowed, and in the years that followed the neoliberal turn, pension coverage came to be viewed as something that employers (including in the public sector) should no longer be obligated to provide.  In Canada, private sector employers began closing and converting DB pension arrangements in 1990s, especially in non-unionized sectors.  This trend then accelerated after the 2008 Great Financial Crisis, when so many pension funds reported large funding shortfalls (“unfunded liabilities”) due to a combination of the stock market collapse and the improvement in life expectancies.

Over the past 10 years, even unionized private sector companies and public sector employers have been attacking their existing pension arrangements, claiming that they must do this to remain “competitive”.  For some private sector employers, and almost all public sector employers, these claims are false and disingenuous — they ignore the fact that so many employers captured huge amounts of pension fund “surplus” in the 1990s and beyond, those good years when financial markets were delivering high rates of return.  The “contribution holidays” that employers took with these surpluses were, in many cases, a key contributor to the shortfalls and deficits that emerged more recently.  But nearly all employers are nonetheless jumping on the bandwagon of attacking workers pensions, and this is a key aspect of the larger capitalist austerity agenda that is taking away income, security, and leverage, from workers.

While some of this is happening at companies facing financial difficulties (US Steel, Air Canada, Big 3 Auto), it is also happening at highly profitable companies like Vale-Inco (2009-2010), Electro-Motive Diesel-Caterpillar (2012), and now Bombardier.  In most cases, these employers don’t have to do this to be profitable — but they know that with the current weakness of labour movements, they can do it successfully and become even more profitable.  The transnational companies (like Vale and Caterpillar) involved are doubly empowered by so called “free trade” policies that facilitate their relocation to lower wage zones and also by their enormous size: they can easily absorb the temporary cost of a strike or lockout at an operation representing a small fraction of their overall production.

“All unions should be committing themselves, in principle and in practice, to resisting these poisonous two-tier pension “offers” from employers, and fighting for the next generation of workers as hard as we do for the current and the previous generations”

For trade unions, and in fact for the entire working class, it’s crucial to look closely at the specific way that employers are changing their pensions.  The main approach has been to close the existing Defined Benefit pension plan for any new hires.  This way, existing workers can be told that *their* plan is protected, and only future workers will be affected.  In a context of real wage losses and attacks on health benefits, sick leave, etc., such an assurance can be hard for union bargaining teams to resist.  But this is a classic divide and conquer approach because it produces a “two-tier” pension structure into a workplace.  Over time, the growing portion of younger workers will realize that they’ve been “sold out” by their own union, if they come to feel that a very inferior pension deal was conceded by “their” union leadership – while they protected themselves from its effects.  We should anticipate that such divisions in a union membership will be easily exploited by employers who will be able to play one generation off against another — including using the divide to attack the original, “protected” DB pension plan of the older generation and its retirees.  In a larger context of increasing precarious work, part-time work, short-term contracts, and contracted-out employment, we are seeing a real potential for a backlash of younger workers against older workers — a dynamic that will thrill our employers.  All unions should be committing themselves, in principle and in practice, to resisting these poisonous “offers” from employers, and fighting for the next generation of workers as hard as we do for the current and the previous generations.

Target Benefit (or “TB”) pension plans have existed in a small number of very specific sector for decades, but they have recently been taken up by some governments and employers who see them as an easier ‘sell’ than pure DC plans.  If we reject the neoliberal idea that retirement security is something for individuals to worry about — not employers or governments — then TB pension arrangements are not good for workers.

“if TB plan funding and investments go badly, there is no option for obtaining additional funding, and it is legal to actually reduce the benefits payable from a TB plan…in both DC and TB plans, the individual worker faces the risks of unfavourable experience – and the employers are relieved of those risks”

Explaining this, it must be said, is a challenge because of the complicated and technical nature of these alternative pension systems.  In the past, TB arrangements were actually established by unions in certain sectors (such as construction trades) where employment is not fixed to one employer that could be counted on to secure a pension plan.  These traditional TB plans usually involved negotiating a fixed cents-per-hour contribution to a “pension fund”, and from that pension fund a pension benefit was paid to retired plan members in proportion to the contributions that were made in their name.  Unlike a DC plan, and superior to them, these plans would be managed with the aim (or ‘target’) of delivering a steady level of income for life, like a DB plan.  However, just like a DC plan, if plan funding and investments go badly, there is no option for obtaining additional funding, and it is legal to actually reduce the benefits payable from a TB plan.  In that sense, in both DC and TB plans, the individual worker faces the risks of unfavourable experience – and the employers are relieved of those risks.

The recent implementation of a particular type of TB plan — misleadingly called “shared risk” — in New Brunswick was a significant development that has had implications for pension policy across the country.  To understand this story, it’s critical to know the historical context in New Brunswick, which had a number of public sector employers mis-manage and underfund their DB pension arrangements into the ground.  That history left the two main hospital pension plans, in particular, deeply underfunded when the 2008-2009 crisis hit hard.  The employers were openly musing about simply closing the plans (which would have hurt all plan members, including retirees).  In the context of harsh austerity policies and budgetary compression, the funding that these DB plans needed was not coming from the employers.  This put the unions in an extremely difficult position, and the end result was a dramatic compromise that involved introducing a new legislative arrangement that allowed these employers to “convert” existing DB pension plans (with secure, promised benefits) to this new TB model under which even already-promised or ‘accrued’ pension benefits can now be legally reduced (but may not be, depending on future investment experience).  It’s also significant that these conversions have the effect of eliminating hundreds of millions of dollars in public sector debts from their books – which achieves one of the other goals of austerity minded governments.

This compromise has triggered a serious and still ongoing debate within the labour movement in New Brunswick about these plans and these policies.  Even more significantly, it has attracted tremendous positive interest among employers, and especially governments, as a possible alternative model for how to structure the attack on workers’ pensions.  For example, in April of this year, the Harper government released a consultation paper that proposes the importation of this New Brunswick style TB pension model into the federal jurisdiction.  While they claim that they exclude the federal public service pension plans from this proposal, all public service and public sector workers in the federal jurisdiction (including postal workers) should recognize this as a key new direction for the Harper government’s continuing assault on their own unionized workers.  We must not trust their assurances that the public service is not targeted.

I should add here that there are important details in the New Brunswick model that the above summary does not capture.  The negotiated deals that were worked out in the two hospital plans, for example, required the employers to bring previously-excluded part-time workers into the new “converted” TB plan.  (They previously only had a pure DC plan)  This was an important victory, achieved within the context of a larger compromise).  These plans also prohibit employer contribution holidays, in the future, which is a good thing.  But the price for these achievements was very high, and the concessions involved can only be understood in the context of the specific history of these New Brunswick plans.  CUPE National, the union that I work for, has taken the clear position that this TB model is not appropriate for the vast majority of cases, and we have been involved in successfully resisting such proposals from many other employers.

RANKANDFILE.CA: The Canadian Labour Congress has tried and failed in recent years to get the federal government to expand the Canadian Pension Plan. What is the history of the CPP vs these employer pension plans.

The establishment of the CPP in 1966 was a huge victory for workers when it was established, and has been a vital public policy success story ever since.  It is fully indexed, virtually universal and portable, and no benefits in pay have ever been reduced.  In that sense, it is a public, DB pension plan that is operated on a hugely efficient and not-for-profit basis.

“The big banks and insurance companies we know today were already powerful in the 1960s, and aggressively opposed a large public plan”

The problem with the CPP is that the original proposal for a public, wage earnings based pension plan that replaced up to 50% of average earnings, was fought ferociously by Canada’s financial industry.  The big banks and insurance companies we know today were already powerful in the 1960s, and aggressively opposed a large public plan that would soak up so much of the retirement “business” that they wanted to obtain.  Most employers also fought against the decent CPP, arguing that they would play a role in establishing pension arrangements through private, workplace based schemes (described above).  The result of this grand confrontation between a working class interest in decent pensions and a the bankers’ and employers’ interest in a more ‘private’ welfare state was a compromise:  the basic benefit level of CPP was cut in half, down to a maximum 25% wage replacement rate.  For most workers, this means very stingy benefits – the current average CPP pension benefit is about $6,000 per year, significantly less for women.  Even when combined with the $6,000 or so we get from Old Age Security (the other public pension, financed out of general tax revenues), the public pension system in Canada is a sub-poverty system for most workers.

For all of these reasons, the Retirement Security for Everyone campaign from the CLC was a hugely welcome development in September 2009.  It was a real recognition of the failure of the existing system, and an affirmation that the original CPP proposal from the 1960s – which would have paid twice the benefits of the current CPP – was entirely justified and more viable and needed than ever.  The intensified employer and government attacks on secure workplace pensions is a clear indicator that the employer class is withdrawing from even its feeble pretence that it accepts responsibility for ensuring that workers are not tossed into poverty in their retirement.  The CLC campaign – focused on the doubling of CPP benefits – achieved some early success in getting that proposal on the public policy radar screen for a couple of years between 2010 and 2011.  But the refusal of the federal Conservatives to consider *any* CPP expansion has created a stalemate on the issue.  The Liberal government in Ontario is now launching a CPP-style Ontario Retirement Pension Plan with support from several other provinces.  While it is less ambitious than the CLC’s proposal, it’s important that they appear to be insisting that the model be structured in a way that would allow a full integration into the CPP itself if and when a federal government that supports decent pensions for workers is elected.

I think a good case can be made for continuing and in fact intensifying the campaign to expand the CPP for all workers in all provinces.   In recent months, the labour movement has been campaigning for its very survival, in the face of various attacks on basic labour rights, including the Conservative Party push in Ontario for US-style “right to work for less” laws.  That work has emphasized the broader, social goals of the labour movement — and the fact that all workers benefit from a strong labour movement even when less than 30% of workers are actually union members.  A serious and militant campaign for improved public pensions is an excellent way to demonstrate solidarity and genuine commitment to the majority of workers with no union who have no workplace pension plan and who will benefit disproportionately from an expanded CPP.