Sunday, December 3

Why defined-benefit pension plans may be about to make a comeback

Higher interest rates and a shift in power toward employees helping fuel a DB renaissance

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A wage increase of 15 per cent over five years was the first thing to catch most observers’ eyes last month when Unifor, the union representing 5,600 workers at Ford Motor Co. of Canada, ratified a new three-year contract with the automaker.

The historic raise was certainly worthy of making headlines. But it was another, less heralded, aspect of the deal involving employee pension plans that has some economists and experts predicting the agreement could signal a new trend in labour negotiations.

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Ford agreed to transfer some union members currently enrolled in the company’s defined-contribution pension plan to the College of Applied Arts and Technology (CAAT) DBPlus Pension Plan — a defined-benefit style plan that shifts more of the burden for funding employee retirements to the employer.

Labour economist Jim Stanford called it a notable win for workers that could set the stage for a broader move toward defined-benefit pension plans as other unions and bargaining units — including those representing employees of fellow automakers General Motors Co. and Stellantis NV — look to negotiate their own deals.

“For at least a quarter century, private-sector employers have been doing anything they could do to get rid of defined-benefit pension plans,” Stanford, director of the Vancouver-based Centre for Future Work, said. “I think it’s interesting that this agreement was able to get one big global private company to say, ‘No, we’re going to shift back and look at a DB-style arrangement.’ I think that could be a sign of more to come in other private-sector operations.”

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Unifor national president Lana Payne.
Unifor national president Lana Payne. Photo by Brandon Harder/Regina Leader-Post

Pension experts say the appeal of DB plans is clear. As opposed to defined-contribution plans, which function more like group registered retirement savings plans (RRSPs) in which employers match employee contributions and the market determines how big each retiree’s nest egg will be, defined-benefit plans are designed to provide employees with a guaranteed income for the rest of their lives once their working days are done.

DB plans are generally indexed to inflation and, as in the case of the CAAT plan, provide benefits to survivors and qualified dependants of members. If a fund isn’t generating large enough returns to cover pension benefits on its own, employers are typically on the hook to make up the difference.

It’s a good deal for labour, but management hasn’t always been as enthusiastic about the concept.

“The history of defined-benefit plans is that they’ve been collectively bargained,” lawyer Murray Gold, a senior partner who specializes in pensions and benefits at Toronto-based Koskie Minsky LLP, said. “The only two groups that have had them recently are unionized workers and senior executives. For the rest, it’s DC.”

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While DB plans put more burden on employers to ensure they are fully funded, experts such as Stanford and Gold say macroeconomic factors have recently made them more affordable.

As the Bank of Canada has jacked up interest rates in a bid to rein in inflation, the price of bonds — a key component of DB funds — has dropped, making the idea of investing in such plans more palatable to employers. Meanwhile, bond yields have been rising, offsetting negative returns in other areas of the funds’ asset mix.

“Higher interest rates will make (DB plans) a bit of an easier pill to swallow,” Gold said.

DB pension plans are having a good year, according to a report released Oct. 2 from financial services firm Mercer. The company said 88 per cent of the DB pension plans in its client database were estimated to be in a surplus position at the end of the third quarter — up from 85 per cent three months earlier.

Higher interest rates will make (DB plans) a bit of an easier pill to swallow

Murray Gold, lawyer

“2023 so far has been good for DB pension plans’ financial positions,” Ben Ukonga, leader of Mercer’s wealth practice in Calgary, said in a news release. “However, as we enter the fourth quarter, will the good news continue to the end of the year?”

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If interest rates level off and eventually begin to fall, bond prices will likely rise. In that case, some observers wonder how long the window will remain open for a DB renaissance.

“The problem is, DB pension plans operate across decades, rather than across annual business cycles, and I think most employers get that,” Robert Hickey, an associate professor at Queen’s University who studies labour-management relations, said.

“So willingness to go back into a class of benefit that might seem like a good deal today, well, they probably are sophisticated enough to know that what looks good today could be very different a year from now.”

Several experts point to another key factor driving the DB resurgence: labour is having a moment. A tight job market has tilted the balance of power a bit more toward workers in recent contract talks, giving unions the leverage to successfully push for improvements to pension plans and other benefits.

Striking Metro workers in August. A tight job market has tilted the balance of power a bit more toward workers in recent contract talks.
Striking Metro workers in August. A tight job market has tilted the balance of power a bit more toward workers in recent contract talks. Photo by Jack Boland/Toronto Sun/Postmedia Network

“The automakers used to be on death’s door, and now they routinely make tens of billions of dollars’ profit a year,” Stanford said. “And the workers look at that and they say, ‘You know what? I’ve had to tighten my belt a lot and these companies are raking it in. It’s time for them to give back.’”

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Even in non-union shops, DB plans could be an attractive carrot for management to dangle in front of highly sought-after skilled talent, he added.

“These days, many workers have the opportunity to be a bit picky in what job they go to, and employers know it,” Stanford said. “Being able to tell prospective workers, ‘We’ve got a pension arrangement here that you can count on’ … I think that could be a big draw in the battle for scarce labour.”

Still, whether the new deal at Ford sets a template that other unions will follow remains to be seen.

Unifor, which represents workers at Ford, General Motors and Stellantis, is currently negotiating a new contract with GM.

Does the labour movement in the private sector have the bargaining power to compel employers to take on risk and cost that they’ve spent the last decade trying to get out of?

Robert Hickey, associate professor, Queen’s University

Stanford said that while the union will stick to its pattern bargaining strategy in a bid to make gains similar to the ones it won from Ford, there’s no guarantee it will achieve the same success — especially considering only 54 per cent of union members who voted endorsed the agreement with Ford.

“Each round of bargaining, the union has to be able to pressure the remaining two companies to accept the same core terms as it negotiated with the first company,” he said. “The pattern system has worked very well for the unions over the decades, but you can’t count your chickens before they hatch.

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“I think in the end, it’s very likely that the union will win this, but whether that takes a strike or not remains to be seen.”

Hickey agrees that a widespread shift to DB plans in union shops is no sure thing.

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“It really comes down to bargaining power,” he said. “Does the labour movement in the private sector have the bargaining power to compel employers to take on risk and cost that they’ve spent the last decade trying to get out of? I think that’s the real question.”

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