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Air Canada's Great Pension Divide?
CBC reports on Air Canada's great pension divide:
One
of the key issues that had Air Canada management and union negotiators
talking right up to the Monday midnight strike deadline was pensions.
The Canadian Auto Workers union — which represents the airline's 3,800
sales and service agents — says the pension changes proposed by Air
Canada would make new hires "second-class workers."What is Air Canada proposing?
The
airline wants the CAW to agree to a number of changes to the pension
program that its customer service employees pay into. The union says Air
Canada's demands for pension concessions are not negotiable.
There appear to be two major stumbling blocks:
- The airline's demand for pension cuts that could see new retirees having their pensions being chopped by an average of 40 per cent, according to the CAW. (The airline says the cuts aren't that big.)
- The
airline's demand that all new hires into the bargaining unit be routed
into a new, defined contribution pension plan, rather than joining the
current employees' defined benefit plan.What's the difference between these two types of pension plans?
The
latest figures show that only about six million Canadians — roughly 40
per cent of employees — were members of a registered pension plan at
the start of 2010. About half were in the public sector and half in the
private sector.
For those with pensions,
the two main kinds are defined benefit plans (75 per cent of those with
a pension plan) and defined contribution plans (16 per cent of all
pension plan membership). The rest are in some kind of hybrid plan.
For
employees, a defined benefit plan is the gold standard in the pension
world. Air Canada's current pension plan for its customer service reps
is this kind of plan.Here are the key points of defined benefit plans:
- DB
plans guarantee a pre-set lifetime pension after a certain number of
years of service. The better plans include partial or full indexing for
inflation.- Both the employee and the employer contribute to this type of plan.
- It's the employer's responsibility to make sure the plan is properly funded to pay the promised benefits.
- It is the employer that must make up any plan shortfall.
Defined contribution plans, on the other hand, sport some key differences:
- The level of payout is not guaranteed. These plans are often not indexed for inflation.
- You and/or your employer contribute a set amount of money each year.
- Your retirement income is based on how the pension plan's investments perform.
- Since there is no specific pension payout guarantee, the employer is not on the hook for future pension plan shortfalls.
- Pension risk with this type of plan is transferred from the employer to the employee.
Aren't defined contribution plans becoming more common?
Yes,
especially in the private sector. Statistics Canada says the number of
private-sector employees covered by defined-contribution schemes rose
by almost 400,000 people between 1991 and 2006. At the same time, the
number of private sector workers covered by defined-benefit plans fell
by 270,000.
Defined benefit plans are still
the most common plans, with 75 per cent of those with a registered
pension plan having a DB plan. But 10 years ago, that figure was 85 per
cent.
Private companies are increasingly
switching over their pension plans to the less-costly defined
contribution arrangements in order to reduce the potential cost of
their pensions, Statistics Canada said.
"Although
[defined contribution] plans have some undeniable advantages for
employees, their increased prevalence suggests a transfer of risk from
employers to workers since 1991," the agency said.Why is the airline asking for pension concessions?
Since
Air Canada is responsible for making up shortfalls in its pension
plan, it says it has no choice but to insist on concessions. The airline says it had a pension deficit of $2.1 billion at the start of 2011.
"This
deficit is not sustainable and has not been sustainable for most of
the decade, as it puts at risk both the viability of the company and
the pensions of all employees," says Air Canada spokesman Peter
Fitzpatrick.
Federal
pension legislation requires Air Canada to make hefty payments in
coming years to address that deficiency. By the airline's estimate, it
will have to make $550 million in past and current pension
contributions in 2014 alone.
Air Canada
spokeswoman Isabelle Arthur says the airline has 26,000 active
employees in its pension plan, which has to provide pensions for 29,000
retired workers, "so we have to find a solution that ensures that Air
Canada remains a viable company."Why is the union fighting so hard on this issue?
The
CAW says making new hires join a new, defined contribution pension
plan weakens the existing defined benefit plan because all new
contributions would be diverted into the new plan.
Defined
contribution plans, which offer no guarantees of final pension
payouts, also create (in the CAW's words) a two-tier system "which
would make second-class workers of future generations."
The
CAW, along with two other unions representing Air Canada workers,
jointly pledged last month to fight any further attempts by the airline
to reduce or eliminate their defined benefit plans.
The
union also notes that the airline's top managers continue to make
millions of dollars annually and enjoy generous guaranteed pensions.
To
be fair, I don't know the details of the dispute, but Air Canada is
doing what most private companies with defined-benefit (DB) plans are
doing, cutting benefits and shifting new entrants into
defined-contribution (DC) plans. basically, new employees get screwed
and older ones get squeezed.
What I do know
about Air Canada's pension plan is that it was poorly managed for years.
The new team running Air Canada's pension is much better, much more
sophisticated and they strive to match assets and liabilities using both
public and private investments. But the pension deficit they inherited
is enormous, leaving them an impossible task of closing an ever widening
gap. That's why the company is fighting the unions hard on pensions. But as the deadline approaches for a strike at Air Canada, union leaders are paying close attention to a fight over pension, and by the looks of things, this fight is just getting started.
***Feedback***
Bernard Dussault, the former Chief Actuary of Canada, was kind enough to share his thoughts on Air Canada's pension dispute:
It is not the first time that I hear the representative of a defined benefit plan sponsor saying, like Air Canada spokeswoman Isabelle Arthur
(“the airline has 26,000 active employees in its pension plan, which
has to provide pensions for 29,000 retired workers, so we have to find
a solution that ensures that Air Canada remains a viable company"), that the
high ratio of pensioners to active members of the pension plan causes
financial hardship to the sponsoring company. This is a myth. When a
private plan is fully funded, this ratio has no impact whatsoever on
the financial status of the sponsor because all money required to pay
all future benefits to existing pensioners is already “in the bank”
(i.e. the pension fund). Air
Canada’s pensions-related financial hardship is mainly (if not
exclusively) caused by all contribution holidays taken so far by the
sponsor.
For a different perspective, read Jonathan Forethought Risk blog comment on Air Canada.
Jonathan states that he believes that the divide was caused by a
mismatch of risk, not contribution holidays. In fact, he demonstrates
that Air Canada has been making regular contributions to its fund. I
think mismanagement by the previous pension fund officers and
contribution holidays are to blame.
»
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Not a pension expert, but did convert my small company DB pension plan to DC before I retired. Reason was cost of DB became too costly and investments were not growing according to assumptions. Same is happening on micro level throughout many businesses in US . As macro economy, we are not growing as in past, and are facing stiff competition globally. If its any consolation, many more Chinese are not starving. In a global economy ,it all evens out amoungst producers and consumers. All the rest is trivia amoung the so-called experts, and those pulling and pushing for benefits on a micro level. Look at the big picture---its not getting any better, except for those on top.
Subsidizing an airline with pensions money.
A novel approach to running a business. Haven't there been enough bailouts and subsidies in the industry to choke a chicken?
Let's see: hundreds of billions in U.S. & Canadian taxpayer dollars funneled through the Export-Import Bank and the Export Development Corporation.
Should be the warning flag that all pensions are fair game in Canada.
Good 'ol Leo. So, Leo, what would be your plan to continue the DB ponzi scheme going that doesn't bankrupt the airline and/or leave the pensioneers with zero, zip, nada? Sad part is the DB participants were promised a bill of good and nobody is wanting to tell them it ain't gonna happen. And, they of course feel 'entitled' to this ponzi money and don't want to hear changes. Not because of the poor, poor new folks coming in, but because these new folk won't be footing the ponzi bill so they can have the 'gold standard'.
Leo,
If you want to know what happens next I have two words for you:
United Airlines
(terminated pension plans with court approval).
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1033
http://www.nytimes.com/2005/05/11/business/11air.html
Leo, here is the worst part of your piece:
No, this is exactly wrong. The new employees are being protected from having to pay for current and near term retirees with their own contributions. One of the reasons that the benefits for current retirees might be coming down (if they are actually in the proposal) is that some monies won't be coming in from new Ponzi participants. This has always been the Achilles Heel of defined benefit plans- they were set up with the explicit expectation that new workers would foot some of the costs of older worker's pensions, but there was just one problem- the retirees eventually outnumbered the present workers, and this is a trend that just gets worse as time goes by. You can certainly put the company on the hook for the difference, but that has an endpoint, too, unless the company is extremely profitable year after year- it is called bankruptcy.
In essence, defined benefit plans are a pretense that there is no risk on the beneficiary. This was never true. Defined contribution plans are the explicit recognition of where the risk always lay to begin with, and it does this fairly and equitably by preventing early Ponzi entrants to benefit at the expense of later ones.
... but that has an endpoint, too, unless the company is extremely profitable year after year- it is called bankruptcy.
Yes, and companies idiotic enough to lock themselves into social-security-style ponzi schemes (a.k.a. definded-benefit plans) deserve to struggle with that huge hole in their cash flow and eventually go tits up. No empathy, no sympathy, let 'em wither and die.
+666
In this article Leo continues his skittle-shitting unicorn fairy-tale fantasies of "gold-standard" DB plans magically fully-funded by near-bankrupt and bankrupt companies, magically managed by saintly managers magically outperforming real inflation, magically resisting mere mortal temptations to sell out their plans for bribes and kickbacks.
Leo apparently believes promises are good as payouts, either can be "taken to the bank", steadily ignoring real-world realities like widespread under-funding, woeful performance lagging way behind real inflation, widespread bribes and kickbacks from selling out to woefully performing investment managers, finally ignoring the biggest fantasy buster of all, goverment looting and eventual confiscation.
Only a fool would cling to such far-fetched fairy-tale fantasies, making Leo a ...well, you decide.
+666
+1 best comment in the thread. moar plz
What? Theres pensioner trouble? I thought central planning and robbing taxpayers was going to fix all that?
Not to worry -- there's no pension worries for management. They might (read will) need to rob some shareholders and worker bees (in addition to the taxpayers) to make sure they get theirs, and they will. It's no different than what's been happening in the rest of the North American airlines. This two tiered pay/pension structure has been sold before south of the 49th. The only ones that came out on top in the end were the asshole robber barons like Bobby Crandell and Carl Icahn. The employees and small shareholders were perpetually without-a-clue.
Insiders will do fine on the shares too, knowing as they do when to buy and when to short them. Anyone else needs a good amount of old fashioned luck to make any money on these flying pigs.
Are we talking about the same Air Canada that has gone tits up broke, what is this now...ummm, six...seven times. Constantly bailed out by the government since the 70's.
we're not talking about a company anymore, we're talking about overpriced flying bars on a tax payers dime. So Air Canada can go fuck itself. It's employee's can go fuck themselves. And that pension plan of theirs...ummm who fucking cares anymore. Seriously Leo.
the pension industry is f**ked ...get your money out now before societies crooks (politicians) rob you of what you have in them
Ireland, France, Hungary, Britain and the American Govts have all started robbing pensions, both public and private ...you don't need anymore warning... this human scum called 'democratic Govt' will take you down with them ...Govt the biggest Mafia in society
***Feedback***
Bernard Dussault, the former Chief Actuary of Canada, was kind enough to share his thoughts on Air Canada's pension dispute:
For a different perspective, read Jonathan Forethought Risk blog comment on Air Canada. Jonathan states that he believes that the divide was caused by a mismatch of risk, not contribution holidays. in fact, he demonstrates that Air Canada has been making regular contributions to its fund. I think mismanagement by the previous pension fund officers and contribution holidays are to blame.
The gentleman states the obvious, without recognizing the impossibility. At any point in time it is impossible to know what the future liabilities and future assets will be. It cannot be adequately funded and managed in a way that both guarantees no declines in asset values, ever, while achieving returns that maintain inflation adjusted asset values. It will always be a mismatch in risk that is impossible to resolve with certainty.
If today's asset values seem to indicate an over funding, should the company continue to make contributions? If today's reduced market values of assets indicates great underfunding, does the company have to liquidate and put all assets into the pension fund?
Air Canada is my second choice to fly and just flew to europe with them to europe. With union labour the flight crews make a carreer out of being stewardess. The only airline in the world with 50 year old stewardesses.
The cow will get milked till its dead.
Those old flight attendants are probably the best people you want on an aircraft if something goes wrong. Call them stewardess's or flight attendants, up to you. If your airplane landed with smoke or fire in the cabin, these old ladies would know exactly what to do and probably sacrifice their own lives to save yours because that's what they've been trained to do. Nice Asian airlines over here with pretty young flight attendants, don't kid yourself, they are highly trained and but I trust my old ladies in my U.S. domestic flights better than these young ones. If a 911 situation were to ever happen in 1st class, please give me a big stewardess. These stewardess can go from waitresses to incredible life saving machines so quick that you had no idea what happened to you and saved your life.
So be careful if you dis the flight attendants.
No doubt you are correct on many points, Chicken. However, there is something to be said for the younger generation:
http://airlines-stewardess.blogspot.com/
A defined contribution plan forces the company to actually FUND the plan today. Both the worker and the company contribute TODAY so that there are assets (unknown future value) available later.
A defined benefit plan only requires the contribution of a promise to pay later. Supposedly the admitted underfunding is $2 billion. Getting that defined benefit becomes a bit risky. If the company goes broke how will the pot be divided? It is not possible to provide a benefit that is economically impossible to define, which is exactly what a defined benefit plan tries to do.
If I were the employee I would prefer to have the actual money paid into my account that I own. If I should leave the company I can take it along with me. Defined benefit plans are not usually consturcted with transferable assets.
Describing this as some sort of unfair situation for the new employees simply demonstrates a poor understanding of how pensions will actually work out. Look at what the airline workers in the US got from their defined benefit plans. And the GM workers will not be able to collect on theirs when the company goes broke again with the pension fund holding the shares.
Like it or hate it, companies aren't in the mood to bear the actuarial risk of defined-benefit plans anymore, and that's entirely reasonable. It's as simple as that, and it's not some giant conspiracy to defraud people or "cut benefits" or any other of the bullshit Kolivakis comes up with.
If you don't like the benefits a company is offering to its employees the solution is simple. Don't work for that company.
easier said than done. Good paying jobs are rare that pay benefits.
What about the other side of that coin, if you dont like a company stripping your benefits and raiding your pension plan after you've worked there your whole life and directly paid into that pension, but the only other choice is unemployment, then what? Give up all your benefits just to keep your job while your wage deflates and the cost of living, gas prices, food prices, medical costs, insurance premiums, taxes, etc, etc all skyrocket?
Austerity, 2010 word of the year by Mirrian-Webster.
If you read the story the issue is about new employees. The existing employees get to keep their defined benefit plan. However, it is unsustainable so new employees cannot be offered the same plan.
"...while your wage deflates and the cost of living, gas prices, food prices, medical costs, insurance premiums, taxes, etc, etc"
Sounds like Social Security to me. That didn't work out to well for us either, unless you actually think you'll pull out of the system what you put into it. The only benefit I trust from an employer is money in my pocket. Everything else is just a promise that is subject to being broken in the future - so I'll be happy taking money. Suckers can take the promises.
Then the company becomes this group-think behemoth where nobody dares a contrarian view.
Union shops are communism in action.
yep, communism with a smiley face. most of the time at least.....
p.s. Leo, do you know how much 'asset-liability' matching actually costs? ISTM, such terminology is merely pension-speak for, "buy a shitload of bonds", which could very well be the last catastrophe that many of these underfunded pension plans can shoulder, essentially embedding losses if/when the economy eventually turns around and starts to grow after the past decade of stagnation.
Like, or hate Air Canada (I actually think they're one of the best airlines in North America and, prior to the economic collapse, flew on them 100+ times a year), the whole sustainability of AC's business model is in question. Even with record aircraft utilization and load factors, they still can't turn a profit in most quarters. Since the privatization in the late 1980s, they've converted an airline which owned most of its assets to an airline which practically leases everything. Its bondholders lost 80% during the last bankruptcy. Its shareholders have been wiped out 3 or 4 times now. AC's offices and hangars are increasingly run down whenever I visit, and the mood is just, on the whole, depressing. The people try their best, but its fairly clear that they're on the wrong side of a losing battle, and it doesn't help that they've had guys like Robert Milton and the new CEO who have taken disproportionately large rewards from the company.
Air Canada has been a great airline...but woefully mismanaged lately.
Look at the relatively quick rise of Westjet.
Got close to 50% domestic market share in only 15 years.
Always the latest equipment, albeit the dreadfully small 737-XXX series.
From a shareholder's perspective however, Westjet is the better bet.
Oh and by the way, Westjet is non-unionized!
Air Canada is never ever going to lose it's stigma of a union shop.
Westjet pays its employees heavily in equity, which has yet to pay its owners a return. Meanwhile the founders have mostly cashed out and moved on. At least AC pays its employees mostly in cash and doesn't tend to stick them with a lot of worthless stock.