Pension systems threatened by global markets
Employees of Canadian Pacific Railway have been back on the job for a few weeks now, the strike ended by the Harper government, and an arbitrator appointed to set terms of the new contract.
The employees are no doubt unhappy and grumpy and probably working to rule. This was the third major strike ended by Harper government – the others were Air Canada and the postal workers.
The Harper government is being painted as unfriendly to labour and unions. Surprise, what Conservative government in Canada has ever been friendly to unions and labour?
The railway strike had a number of issues, but pensions seem to be the overwhelming concern for both employees and employer. Other issues have less impact on the future of the company.
Canadian Pacific Railway has 16,000 employees and 18,000 retired employees. The cost of providing pensions is a huge burden and drain on cash, in management’s opinion. That partly explains why management wants a lower cap on the pensions.
An engineer can get a $90,000 pension – about 85 per cent of his earnings. The CNR has dealt with this issue. The same engineer with CNR has a $60,000 annual cap on pensions.
If Canadian Pacific is ever to get its cost ratio competitive with CNR, something has to give with pensions. And this railway is a high cost railway in North America.
The pension issue goes deeper than just trimming costs. If this railway isn’t careful, pension costs will harm its future.
We saw the same scenario unfold four years ago when GM, Chrysler and Ford restructured their pension plans and health benefits. GM was no longer competitive. The company had to build an extra $1,500 cost into every vehicle just to pay for these benefits. Chrysler and Ford were in the same boat. Ford managed without a government bailout.
Canadian Pacific with its top heavy pensioner to employee ratio faces the same future. And other major corporations face the same issue,
The question is how did we get here? Since the 1960s, we have enjoyed relatively good times. It was easy for pension managers to get seven per cent annual returns in pension funds. Those returns sustained the pensions. Some years were even better. Some companies pulled out the excessive returns as profits.
The situation has changed almost 360 degrees. People are living longer in retirement. The pension fund must be larger to sustain more years.
Near automatic returns of seven per cent are no longer available. Interest rates have fallen into two per cent to three per cent ranges. The stock market is riskier and more volatile than ever.
Pensions funds can’t make it any longer. Slashing benefits appears the only way out if businesses are to stay operating. You feel sorry for people who have worked hard all their lives to find that the golden retirement egg is lead.
Businesses aren’t the only ones looking to cut pension benefits. A number of U.S. cities and even the State of California with huge pension deficits are mulling over all options.
Compounding the matter is low wages and benefits paid to workers in China and other such countries. Those wages make them more competitive in the market with us. The pressure is on North American wages and benefits like pensions.
Ron Walter can be reached at firstname.lastname@example.org