Dale Seto is accustomed to toiling out of the spotlight. Most days, the aircraft mechanic crawls around inside the guts of an Airbus jetliner, grease on his hands. “We’re kind of the underdogs,” says Seto, 57, who has worked for Air Canada for the past two decades. “But in my opinion, we perform the most important function in the entire airline industry, and that’s making sure that the planes are safe and ready to fly.”
Hundreds of thousands of lives depend on the quality of work done by Seto and his colleagues, but he says the industry’s perennial woes means they haven’t had a pay raise in nearly a decade. That helps explain why he and12,000 Air Canada employees represented by the International Association of Machinists and Aerospace Workers jealously guard their defined benefit pension plans, an increasingly rare species of retirement income in the private sector. More than just a perk, defined benefit plans—in which the employer guarantees retirees a certain level of benefits—are viewed by workers as a key element of overall compensation.
But Seto’s plan to retire in two years has been called into question. Last year’s market crash kicked the stuffing out of many corporate pension plans, including Air Canada’s. Combined with a long period of historically low interest rates, the crash has left many pensions seriously underfunded. And companies already grappling with the economic downturn can’t afford the millions it would take to make them whole. “You had this sort of super-perfect storm,” says Scott Perkin, the president of the Association of Canadian Pension Management.
It’s not just the grey-haired among us who are affected. Increasingly, employers are abandoning traditional, gold-plated defined benefit plans and asking new hires to participate instead in defined-contribution models, which pass the investment risk on to employees. Meanwhile, many smaller firms don’t provide their workers with pensions at all because of the costs, leaving a majority of Canadian private sector employees without coverage. Governments claim fixing the system is a priority as legions of baby boomers prepare to leave the workforce over the next few decades. As pressure to do something mounts, Ottawa hurriedly unveiled a series of measures earlier this month to beef up the seven per cent of private sector plans in Canada under federal control. A step in the right direction, to be sure, but a tentative one at best. Ontario, too, has promised to take action to better protect the plans it oversees, but has yet to reveal specifics.
The harsh reality is there is no easy answer to the pension crisis. Any solution, experts say, requires meaningful legislative changes and a rare level of co-operation between Ottawa and the provinces, which are scheduled to have a pension summit in Whitehorse next month. It may also require a fundamental change in people’s attitudes toward retirement planning in general.
With their pensions in jeopardy and nowhere to turn, hundreds of employees of Nortel Networks descended on Parliament Hill last week in search of help. As Nortel is broken up and sold off in pieces under bankruptcy protection, there’s a risk that some of its underfunded pension plans—with a combined shortfall of between $2 billion and $3 billion earlier this year—could be wound up. In theory, these pensions are protected by virtue of being held separately from the plan’s sponsor, although underfunded plans typically stay that way once a company files for protection from its creditors. In Nortel’s case, some 20,000 employees face as much as a 30 per cent cut to their benefits. A similar story is playing out with employees of paper giant AbitibiBowater and media conglomerate Canwest Global Communications, both of which are operating under bankruptcy protection and are facing serious pension shortfalls.
Temporary fixes have been offered by Ottawa and some provinces—companies are typically given five years to top up underfunded plans, although that has been extended in some cases to 10 years—but the measures are the equivalent of sticking a Band-Aid on a heart attack patient. The Nortel situation in particular has prompted Quebec to take matters into its own hands. The provincial government has offered to backstop some of the 3,750 Nortel employees in the province by having Quebec’s pension plan, run separately from the mandatory Canada Pension Plan, take charge of the assets. The arrangement, described as a “special situation,” would last a maximum of five years and is bound to ratchet up the pressure on Ottawa to take similar measures for employees elsewhere.
Just how widespread is the pension problem? The average private sector plan is only 72 per cent funded, according to consulting firm Mercer. That’s up slightly from a low of 60 per cent back in March thanks mostly to the market’s halting steps toward recovery. The levels are higher, but still underwater—88 per cent, according to the most recent numbers—in federally regulated plans, including those sponsored by Canadian National Railway, Bell Canada and Air Canada. In fact, the only group in the country that can breathe easy are those who are employed by governments, which offer mostly gold-plated defined benefit plans that aren’t in danger of being abandoned.
Even when augmented with employees’ other retirement savings (which also took a major hit from the market crash), it all translates into a significant decrease in income and could mean the difference between a retirement spent golfing and travelling, and one spent looking for ways to pay the bills. Only Ontario has a pension guarantee system, funded by corporate contributions, that promises to pay out retirees who have had their pensions cut, but only to a maximum of $1,000 a month. But even that fund is facing a massive shortfall. “It has created a number of stresses, both on companies and individuals,” says Paul Forestell, who heads Mercer Canada’s retirement, risk and finance business.
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