Canadian Pacific Railway Ltd. is proposing cost-cutting changes to retirement plans for employees, illustrating the pressure many major employers are facing because of high pension costs.
CP and the Teamsters Canada Rail Conference are holding labour talks this week as a five-year collective agreement edges closer to expiry on Dec. 31.
The move by the country's second-largest railway comes as many major corporations get sidetracked by the wide gap between pension asset values and obligations, forcing them to make huge increases in pension contributions. One option for CP will be to introduce a defined-contribution plan for new unionized hires or a hybrid formula that blends a DC system with the current defined-benefit pension, which provides a guaranteed payout level upon retirement.
Air Canada, for example, sought to place new hires into defined-contribution plans earlier this year. An arbitrator, however, sided with the Canadian Auto Workers' pension proposal for new sales and service agents that combines defined benefit and less costly defined contribution. During bargaining, the CAW agreed to reduced payouts for airline employees who opt for early retirement starting on Jan. 1, 2013.
Non-unionized Canadian employees at CP hired after July 1, 2010, have already been placed into defined-contribution pensions.
"Canadian Pacific has borrowed over $1.3-billion to fund our pension plan in the past two years, beyond the significant annual pension cost we normally have. That is neither sustainable nor desirable, and recent market declines have made the situation worse," CP negotiators said in a presentation to the Teamsters, which represents 4,800 conductors, engineers and rail traffic controllers.
Credit rating agency DBRS Ltd. cautioned Tuesday that CP's $673-million pension-solvency deficit is at risk of rising in 2011, despite the railway's voluntary contributions of $500-million in 2009 and $650-million in 2010.
"With the low interest rate environment and poor pension asset performance, the company's underfunded position is likely to materially grow beyond the $673-million reported for Dec. 31, 2010," said DBRS, which lowered its long-term debt outlook last week for CP to a "negative trend" from "stable."
CP plans to contribute between $100-million and $125-million this year to its defined-benefit pension plan.
"We propose to initiate a robust discussion during bargaining on the design and projected cost of the pension plan and to find ways to protect accrued pension benefits while ensuring the long-term sustainability of the plan," CP told the union.
Calgary-based CP acknowledged that its operating ratio, a key indicator of productivity that measures costs as a percentage of revenue, is the worst among North America's Big Six railways.
Canadian National Railway Co. has the industry's best operating cost-to-sales ratio. "Our competitor has a lower operating ratio and generates more free cash," CP negotiators said, noting that Teamsters officials "know that the competitor's pension and benefit offerings are far less than those at Canadian Pacific. This must be corrected to level the playing field."
CP spokesman Ed Greenberg said Tuesday that the railway "believes a deal is possible. We have an enviable record of effective labour relations."
A union official said the labour talks are still in the early stages, but declined comment about the negotiations in Winnipeg.
CP's quest to cut pension costs comes as William Ackman, the head of New York-based Pershing Square Capital Management LP, pushes the railway's executives to revamp the freight carrier's underperforming operations. The activist hedge fund disclosed last month that it had accumulated a 12.2-per-cent stake in CP, becoming its largest shareholder.
DBRS said the railway has strengths in exporting commodities such as grain and coal, but warned that any future voluntary pension contributions "would likely be funded with additional debt."
The freight carrier has little room for weaker financial performance, said DBRS. "If the company's metrics decline below the acceptable range for the BBB rating category, a one-notch downgrade may result," warned the credit-rating agency.
CP has been playing catch-up after severe winter storms and flooding temporarily closed vast portions of its tracks in the first half of 2011.
Seeking greater flexibility from the Teamsters in operating trains, CP said it wants "the ability to unilaterally establish work days that are up to and including 12 hours in all types of service" and new rules to spread out "available weeks of annual vacation throughout the year."