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the long view

A pension is supposed to provide a stable foundation for a long retirement. But, in some cases, that foundation can be shakier than people realize.

The Canadian Commercial Workers Industry Pension Plan has just provided a disturbing reminder of the shocks that are possible.

CCWIPP announced last month that the roughly 24,000 people who are collecting benefits from the plan will have their pensions cut by 10 per cent beginning in July, while those who are still working and contributing to the plan will suffer a 20-per-cent reduction in the pension benefits credited to them.

The benefit cuts at CCWIPP, which covers nearly 400,000 people in the grocery, food service and production industries, should encourage all of us to learn more about our own pension plans. While the surging stock markets of recent years have been good news for plans' investment returns, today's low interest rates have worked in the opposite direction by increasing the amount of money required to fund future payouts.

The growing cost of providing retirement benefits has put pressure on pension plans. They have responded in various ways – from increasing contribution rates, to curtailing new members, to cutting benefits – as they attempt to keep their promises in line with financial reality.

"These decisions [to reduce benefits] are never easy to make, but the reality is that we had a financial situation that needed to be addressed to maintain long-term stability," said Paul Meinema, national president of United Food and Commercial Workers Canada, which established CCWIPP in 1979.

Multi-employer plans such as CCWIPP are vulnerable to benefit shocks because of their structure. They are typically found in unionized industries and span employees across many companies – more than 200 in the case of CCWIPP.

Employers agree to contribute to the pension plan at a certain rate, but they make no commitments about the level of benefits those contributions will produce. If results fall short of what is hoped for, employers are not obligated to make up the difference.

Malcolm Hamilton, an actuary and retirement expert, says multi-employer plans can easily be misunderstood by those who are enrolled in them. They are often assumed to be just like defined-benefit plans that cover only a single company.

That's a mistake. In a defined-benefit plan, the employer commits to providing a certain level of retirement payout to plan members and must live up to that commitment so long as it is solvent. In contrast, multi-employer plans aim for a certain level of payouts, but don't guarantee them.

As Mr. Hamilton notes, it's difficult for administrators to communicate the uncertainty that is built into multi-employer plans. As a general rule, plan sponsors have little interest in aggressively warning members about the possibility their pensions may be lower than they think. And when warnings are issued, members often ignore them.

To be sure, it can be difficult for people without a financial background to come to a complete understanding of their pension plan's status, even if they dutifully read the plan's annual report.

The CCWIPP had suffered one black eye in the past, although of a relatively minor nature. In 2009, the Ontario Court of Justice found nine of the plan's trustees guilty of failing to supervise the plan's investment committee, which made investments in Caribbean hotels and resorts that were larger than permitted by regulation in 2002 and 2003. Although there was no proof the fund suffered any financial loss as a result, the trustees were each fined $18,000.

By themselves, the plan's investment returns didn't appear to be a cause for great concern: They averaged a respectable 7.8 per cent from 1979 to 2013, and 8 per cent over the most recent five years of that span.

However, those results weren't sufficient to keep up with the plan's goals. At the end of 2012, the plan's annual report stated it was only 67-per-cent funded on a going-concern basis – in other words, assuming the plan were to continue indefinitely – and only 31-per-cent funded if the plan were to be wound up immediately.

The report assured readers that such deficiencies were "not uncommon" but also pledged to find solutions to provide the plan "with a more solid financial foundation."

Mr. Meinema attributes the plan's recent problems to the lingering impact of the financial crisis as well as the added cost of providing for increased longevity among plan members.

He says his priority is ensuring the viability of the plan for the long haul – a big job in an era of low interest rates.

"Not everyone is happy [with the benefit reductions], as you might expect," he acknowledges. "But most of our members are very happy the plan is being maintained."