The new pension plan for NHL players should improve the league’s status as the “poor cousin” of professional sports leagues in terms of pension offerings, and will provide a better cushion for ordinary players, experts say.
While the league has revealed few details about how the new pension plan will work, it has said it plans to create a new defined benefit (DB) pension plan, which is a traditional pension plan that pays a guaranteed level of income in retirement. The NHL currently has a defined contribution (DC) plan that operates similarly to an RRSP, with payouts varying depending on the performance of investments selected by the plan members.
The NHL previously had a DB pension plan for its members, but switched to a DC plan in 1986. Now it is planning to switch back at a time when it is rare for employers to create new DB pension plans and many are closing their plans and transferring employees to lower-risk DC arrangements that don’t lead to expensive shortfalls that must be funded by the employer. But players pushed for the plan as part of a trade-off for reducing salary caps and lowering their share of league revenue, calling the pension deal a centrepiece of their new contract.
“It’s definitely very surprising, because in the general marketplace we’re seeing movement away from the defined benefit pension plan due to the future liabilities it imposes on owners or employers,” says Peter Landers, a director at Global Governance Advisors compensation consulting firm.
The NHL has been the “poor cousin” of pension plans in pro sports, says pension lawyer Mitch Frazer. NHL players were eligible to earn a maximum of $50,000 (all currency U.S.) a year in 2012 after playing at least 160 games, while players in Major League Baseball need 43 days of service to begin to qualify for a pension benefit of $34,000 a year, and analysts say baseball can earn pensions of $200,000 annually with 10 years of service.
Frazer said the NHL’s new pension arrangement may be a rounding error for superstars like Sidney Crosby, but it will provide security for other players, many of whom have little financial education and find their careers cut short after just a few years.
“In the long run, it’s not good for the NHL to have news stories about homeless athletes,” Frazer said.
In December, players were already pointing toward the pension plan as a potential win. Kevin Westgarth, a Los Angeles Kings forward and a member of the NHLPA’s bargaining committee, acknowledged a DB pension is “way out of style,” but said hockey is a much different industry than most. He said the pension was likely the “only thing” players could count as a win in the long lockout.
When the deal was settled after the long final talks last weekend, Ron Hainsey, the Winnipeg Jets’ defenceman who was a central player in the talks, called the DB plan “the centrepiece of this deal.”
Massive contracts such as Sidney Crosby’s $104-million over 12 years grab headlines, but the typical player makes less, though it is still a lot. The median salary on the Toronto Maple Leafs, for example, is left winger Nikolai Kulemin, who is on a two-year, $5.6-million deal. The biggest issue for average, and fringe, players is length of career – the time to make any sort of big money. The time is short. According to QuantHockey.com, the average career through history has stretched barely more than a season, with the median number of games played standing at just 86 regular-season games.
Players have credited the pension win to their solidarity, which was considerably stronger than eight years ago during the last lockout, when the union fractured. Henrik Sedin, captain of the Vancouver Canucks, credited the fringe players for sticking with the extended process where their careers hung in the balance.
“The guys that I’m most impressed with are the fourth-liners, [and] the sixth, seventh, eighth defencemen, that doesn’t make a lot of money but they were still sticking with the union, and that’s impressive,” Sedin said.
Pension experts are waiting to hear more details about how the plan will be structured.
Pension lawyer David Vincent said pension rules in Canada only allow people to accrue a pension worth a maximum of 2 per cent of their income per year, which means it takes 35 years to earn a pension worth 70 per cent of preretirement income. Research by website QuantHockey.com says a typical NHL career between 2000 and 2010 lasted for 2.9 seasons, too short a time to derive big gains from a traditional pension plan.
“It would not be a large pension relative to the earnings they have while they are players, but it would provide a minimum standard of living,” Vincent said.
Because traditional registered pension plans also have low caps on how much can be contributed annually by employees and employers – similar to RRSP contribution limits – experts predict the NHL may set up what is known as a “supplemental” pension plan like those typically created for top corporate executives.
Supplemental plans have no caps on contributions and wide flexibility in how they can be structured and funded, so are attractive for high-income individuals. But they are also not legally registered pension plans, which means they don’t have the same government scrutiny of funding and legal obligations on employers to fund any shortfalls within five years.
Compensation expert Ken Hugessen said while some companies simply pay the annual pension without setting aside assets to fund supplemental executive plans, he would anticipate the NHL players association would insist on creating a trust to fund the pension if a supplemental plan is used.
“I could see the players pushing to have the thing funded as a measure of security so if the league blows itself up, somehow they are not left holding a worthless pension promise,” Hugessen said. “We all know those horror stories.”