Blame game: the CAW pension affair

The Detroit Three, explained Lewenza, have been paying into the PBGF for years and deserve coverage just like any other plan sponsor. “To suggest that retirees will bear the brunt of something they have no control over is just unconscionable,” he said.

According to Lewenza and other union officials, the CAW is being forced to pay for the mismanagement of the GM pension plan and is the ultimate victim in this scenario.

Solvency and surplus

However, the origins of today’s precarious pension predicament may go as far back as the ’80s, according to risk management consultant Jonathan Jacob. He explains that the ramifications of two decisions from that era are being felt today.

The first decision was to cap contribution rates for plan sponsors once the plan’s funding ratio reached 110%, which prohibited organizations from topping up their plans in good times. The second decision stated that any pension surplus belongs to plan members, while the shortfalls belong to the plan sponsor.

“This created an asymmetric risk equation,” says Jacob. “The bottom line is, if you’re a company that wants to wind up your pension plan, the last thing you’ll want to do is continue to top up the plan to create a situation where there may be a surplus—because you’ll never see the benefit of it. We’re perfectly set up for the current situation to occur because of those two components the government enacted a long time ago.”

Jacob adds that the CAW’s claims that workers are being abandoned don’t hold up to close inspection, as the unions have been part of pension discussions for years.

“Usually, in those types of pension plans, you have at least one or two high-level union members who sit on the board of the plan,” he explains. “So they would be well aware of how things are being invested.”

According to Kevin Sorhaitz, a principal with Buck Consultants in Toronto, the problem comes down to an unrealistic approach to solvency relief.

“I think we’re paying the price for a solvency relief provision that assumed or hoped that there was no real risk of company bankruptcy,” he says. Long described as “guaranteed” pension promises, Sorhaitz explains that defined benefit (DB) pension plans are now being seen in a more pragmatic light.

A DB pension plan, he says, is only as secure as the amount of plan assets compared to the plan’s liabilities the extent to which invested assets move with the plan’s liabilities and the sponsoring entity’s ability to continue making contributions.

“Of course, a pension plan can ignore the above factors and get lucky when markets soar,” he says. “Unfortunately, the past decade should serve as a reminder that this approach is inappropriate for most—if not all—pension plans, if the goal is to ‘guarantee’ a future promise and protect pensioner incomes.”

Shared responsibility

Sorhaitz says no parties to the current situation are without guilt.

“The government provided relief, and it didn’t work out,” he explains. “Companies exercised their right to minimum fund instead of funding properly. And unions negotiated higher benefits instead of better-funded pension plans.”

An additional culprit may be the investment methods that plan sponsors use, suggests Jacob. He questions the traditional asset mix of 60% equities and 40% fixed income often assumed by institutional investors.

“Auto companies have plans that are extremely mature,” he says. “A mature plan should have far less allocated to equities than a smaller, younger plan.” He illustrates the typical glide path of an individual investor—from overweight in equities at a young age, to underweight in equities as retirement approaches. “As a plan matures, your allocation to fixed income should be way higher than what these plans have been allocating.”

Sorhaitz points to the rise of liability driven investment (LDI), which is now being employed by many institutional investors as a way to balance risk.

“There is a lot more talk about LDI objectives, where assets are invested to match the change in a plan’s liabilities plus a specified additional amount,” he says. “If you’re going to take equity risk, you’ve got to be prepared for the rainy days when your return is well below your funding assumption.”

“When times were good, most of us forgot what pain associated with negative returns felt like. We are certainly reminded of it now.”

Fear factor

An unintended casualty in the battle between GM, the CAW and the Ontario government is the average DB plan member, who may be unduly influenced by alarmist statements. A quick scan of pensioners’ remarks in the media betrays a fear of losing all pension benefits—an outcome that is extremely remote, according to Jacob.

“The tragedy is that some people believe their entire pensions are at risk and that’s not anywhere near the case, in my opinion.”

The latest round of bargaining between CAW and Chrysler Canada is proof that a compromise can be reached, as an agreement hammered out on Sunday stipulates that union workers will now contribute to their own pension plans and receive less funding toward certain healthcare benefits.

However, until the problem of solvency relief and general DB plan management is solved, the issue is not likely to go away soon, says Sorhaitz.

“Both sides—company and unions—have largely ignored pension funding for years, and now people are scrambling to deal with it.”

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