Firms turn to employees for pension relief

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Some of Ontario's largest companies, facing massive deficits in their pension plans, are turning to their employees in a bid to help solve a deepening funding crisis.

Chrysler Canada Inc., ArcelorMittal Dofasco Inc. and other companies – large and small – have asked their employees to let them take advantage of a special Ontario government rule that allows companies to stretch contributions to underfunded defined-benefit pension funds to 10 years from five.

The requests to extend pension funding underline the seriousness of a decade-long pension crisis that has sent some Canadian firms into bankruptcy protection, caused cuts in benefits for tens of thousands of pensioners and could put governments at risk of having to bail out underfunded plans.

The current pension-funding deficits, which ran to more than $1-billion at some employers and almost $30-billion over all in 2011, have deepened since the 2008-2009 recession despite decent returns on assets as stock markets have recovered. The culprit is low interest rates – the very policy adopted by central banks to spur their economies and encourage companies to engage in capital spending and other job-creating investments. Low rates restrain pension returns and increase liabilities.

The Ontario rule, first put in place in 2009, was reinstated on Nov. 1, 2012, and the number of companies seeking the funding extension appears to be growing.

There is "absolutely" more interest in using the funding relief today than there was in 2009, said Mitch Frazer, a lawyer who advises companies on their pension plans.

"More plans have been underfunded for a significantly longer period of time," Mr. Frazer said. "Now people realize these shortfalls and these low interest rates might be here for a very long time and that's changed the whole game."

One prominent company asking employees for help is Chrysler.

The auto maker faces payments of $296-million annually or nearly $1.5-billion over the next five years to restore its fund to health, the company's labour relations director Todd Bested said in a memorandum. If its request is approved, annual payments will fall to $219-million and spread the $1.5-billion out to 2019. In either case, a rise in interest rates would relieve some of the burden.

The Canadian Auto Workers union is recommending to Chrysler employees that they agree to an extension.

The Financial Services Commission of Ontario (FSCO), which regulates pension funds in the province, said it has no data yet on how many companies are planning to seek relief to extend their payments to 10 years.

Earlier numbers, however, underline the deterioration of pension plans. As of June 30, 2011, 88 per cent of the province's 1,438 defined-benefit plans had a funding deficit on a wind-up basis, which measures the value of assets in a plan versus the liabilities it would have to pay out if it were wound up on a certain date.

FSCO forecast that the average fund would have assets that would cover just 72 per cent of liabilities at the end of 2011, compared with 87 per cent at the end of 2010.

ArcelorMittal Dofasco shows a typical decline. As of Dec. 31, 2011, assets in the plan for non-unionized employees of the steel maker covered 52 per cent of liabilities, versus 65 per cent a year earlier.

In 2004, Don Pether, then chief executive officer of Dofasco Inc., (before it was taken over by ArcelorMittal) pointed to its fully funded pension plan as offering "a strategic advantage." But in recent years, record low interest rates and lower returns on investments have caused the deficit, spokeswoman Marie Verdun said Wednesday.

Members of the ArcelorMittal Dofasco plan recently turned down the steel maker's proposal to stretch out the funding.

Like many manufacturers, ArcelorMittal Dofasco and Chrysler are grappling with another problem in addition to low interest rates: a growing number of pensioners and a shrinking number of active workers. ArcelorMittal Dofasco's plan covers 7,100 retirees and 4,400 active workers.

ArcelorMittal Dofasco will continue to finance the plan, as required by the Ontario regulations, Ms. Verdun said.

Unionized employees of The Globe and Mail turned down a similar request from the newspaper's management last week.

Employees at AGS Automotive Systems, a Toronto-based auto parts maker, approved that company's request, said Greg Davies, head of the Canadian Auto Workers unit at the company's Oshawa, Ont., plant.

Employees discussed whether agreeing to the plan would mean the company would have money to invest, but would do so at a plant in Sterling Heights, Mich., rather than its Canadian operations, Mr. Davies said.

"If we do this are we cutting our own throats, freeing up capital that they can invest south of border rather than here? The owners came in and explained to the guys and they are spending money on this place now and I think they do have long-term interests here so I think that swayed a lot of the people."

More companies are opting for the change now than in 2009 because pension reporting rules allowed companies to "smooth" their results – or average out returns from recent years – which had the effect of mitigating the market drop of 2008, said Manuel Monteiro, a partner at pension consulting firm Mercer.

Such smoothing, for many companies, reduced their modest shortfalls to a point where relief was not necessary, and meant companies could avoid seeking its employees' consent to extend payments to 10 years.

"In most cases three years ago, smoothing got them as good a result as the funding relief," Mr. Monteiro said.

But after several years of growing liabilities and ballooning deficits, the smoothing benefit has run its course and will no longer help reduce the funding requirements. "Right now, your smoothed value is pretty much the same or lower than your market value."