For the longest time, it looked like this moment would never come. But it turns out 2013 was the lucky year of the pension fund turnaround.
Surpluses are around the corner, as every actuarial firm is now clamouring. Companies and pensioners can thank a roaring American stock market and rising long-term interest rates, which determine how much money must be set aside to make sure a company’s retirement commitments are met. (The lower the rates, the higher the cash must be piled up.)
Consulting firm Mercer confirmed that the average Canadian plan has all the assets it needs to live up to its promises; at the end of 2013, pension plans were 99.9-per-cent funded. After years of deficit angst, and with one brief sigh of relief, some companies are already thinking of ways of cutting their retirement contributions.
So surprising a turnaround this is that one could be forgiven for thinking he or she had woken up in the early 1990s, when Bryan Adams was topping the charts with (Everything I Do) I Do It For You and when companies and their workers were wrestling over pension fund surpluses.
Abysmal pension deficits have been a fixture of business since the turn of the millennium. Those financial obligations became so important that they threatened the very existence of older companies such as Air Canada or AbitibiBowater, now reborn as Resolute Forest Products.
How companies have restructured their pension plans and tackled their funding shortfalls in the past decade and a half will have a lingering effect that is certain to outlive the deficit era, however.
Pension funds are much more than a financial liability on a balance sheet. In many companies, it is the tie that binds.
In a twisted, Machiavellian way, some companies may even come to regret the days of the pension deficits. For a number of companies, proposing dramatic changes to pension plans was akin to putting a finger on a nuclear trigger. It was the one thing that unions of all affiliations wanted to prevent at all cost.
In fear of losing decent retirement incomes, a number of employee groups made concessions on their pensions such as on indexation, but also on their compensation and working conditions – concessions their predecessors would never have contemplated. For companies renegotiating collective agreements, this was the perfect weapon to brandish.
In fairness, only a minority of Canadian workers are fortunate enough to contribute to a company or institutional pension plan, even of the weaker defined contribution kind, where there are no guarantees as to your future retirement income. In Quebec, for instance, only 39 per cent of workers have access to a pension plan beyond the Régie des Rentes du Québec (the Canadian Pension Plan in the rest of the country) and Old Age Security.
Moreover, those company pension plans needed to be changed to address the longer life expectancy of Canadians as well as the demographic changes that made them unsustainable. It was crazy stupid to let people retire at age 60 or below when they were in tip-top mental shape, with little financial penalties to the pensions. Ads such as the infamous Freedom 55 television spots and companies that wanted to lay off employees in flocks even encouraged this short-sighted practice.
In short, there is no disputing that changes to company pension plans were needed. But by offering defined contributions plans to new employees instead of the safer defined benefits plans, as it is increasingly common, companies have undermined their relationship with their work force. Loyalty is a street that runs both ways.
Employees with defined benefits plan may think twice before switching jobs because of the impact it may have on their finances down the road if they lose their better plan. But employees without such guaranteed retirement incomes, likely the youngest minds, will have no such qualms. Of course, there may be other ways to secure their loyalty, but as baby boomers are about to retire in droves and labour shortages are bound to creep up, a solid retirement plan is assuredly one of the best ways to keep valued employees.
And a guaranteed or at least a partly guaranteed income retirement plan might not be as unsustainable as some critics have claimed. Nowadays, “de-risking” the remaining defined benefits plans is all the craze. With pension plans close to registering surpluses, managers can shift assets out of risky stock markets and invest into less volatile alternative asset classes such as private investments or real estate. It is also possible to neutralize to a large extent the risk of interest rate fluctuations by matching liabilities with assets.
Pension deficits may become a nightmarish souvenir of the 2000s. And if some minor reforms and some astute investment tactics prevent them from recurring, there is no good reason for the defined benefits plan to be on the endangered species list.