Defined Benefit pensions aren’t broken

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Vaughn Hammond’s column in the July 13 Weekend Telegram “St. John’s city council leading by example on pension plans” urges governments to abandon the Defined Benefit (DB) pension plans for their workers and to institute less-secure Defined Contribution plans in their place.

Hammond suggests that our DB pensions are structurally broken and that these plans are fundamentally unfair. We strongly dispute the claims he makes and the flawed solution he proposes.

Our pension laws require DB plans to undergo financial evaluations every few years to ensure that there is enough money being set aside to fund the retirement promises being made. Hammond suggests our plans are structurally broken, yet openly acknowledges that the deficits in these plans only arose “in the last few years.”

This point cannot be stressed enough. The current funding challenges faced by pension plans are not due to some kind of structural flaw in the model itself, but are largely the result of the market crash of 2008.

We should remember that for decades prior to the crash, the problem was not that plans were underfunded, but that there was too much money in pension plans. This meant years and years where employers were able to use plan surpluses to reduce their own pension contributions.  We heard little about “unsustainable” pension plans during these decades.

The crash of 2008 and the ensuing recession, however, left pension plans, like all investors, with some financial ground to make up. The law provides timelines for these deficits to be amortized, and the good news is that pension plan health is improving across the country. CUPE has been a reasonable partner in ensuring pension plan sustainability by working out deals with employers across the country.

In all of this, we see no evidence that DB plans are fundamentally broken. It would be shortsighted to permanently abandon an innovative and time-tested model to deal with temporary and surmountable challenges.

Working people have fought to establish and defend the DB pension model for good reason. The risk-pooling mechanisms and economies of scale inherent in these plans mean a high level of retirement security can be achieved at an affordable cost. The pensions paid from our good DB plans are in fact quite modest — an average CUPE member would receive less than $18,000 annually after a 30-year career of work and pension contributions. Many receive much less. The bulk of this pension will be paid from investment returns over the years, with the remaining cost affordably shared between worker and employer contributions.

Abandoning these plans will be costly and painful for individual workers and for our economy. Defined Contribution plans place many unnecessary risks, such as the risk of outliving retirement savings, on individual workers. Study after study shows that Canadians without good workplace pension plans are not saving enough for retirement. Without good DB pension plans, more and more seniors will live in or near poverty. This means bigger taxpayer bills for the public support programs for low-income seniors that are provided by all levels of government.

Pitting public-sector workers against other workers and taxpayers, as Hammond does, is divisive, simplistic and fails to propose a real solution to the perennial problem: how to ensure a decent and secure retirement for all workers. Attacking workers with pension plans is not a solution. Retirement security cannot come by pulling workers down in a race to the bottom.

We would be better served by concentrating on improving the prospects for Canadians without workplace pension plans. This is why CUPE and the labour movement have been campaigning strongly for an expansion of the Canada Pension Plan, which benefits virtually all working Canadians: private sector, public sector, non-union and union workers.

Let’s preserve the aspects of our pension system that are working efficiently and concentrate on expanding the aspects that can bring much-needed retirement security to the 11 million Canadians without workplace pension plans.

Wayne Lucas

President,

CUPE Newfoundland Labrador

Organizations: CUPE, Canada Pension Plan

Geographic location: Labrador

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Recent comments

  • Lane
    July 26, 2013 - 10:27

    Lucas says defined benefit plans are an affordable way to ensure financial security in retirement. I disagree. Defined benefit plans may be affordable to the few unionized workers who receive them, but they are not affordable to the taxpayers who provide most of the funding. And they are becoming less and less affordable as the population ages. Lucas' letter is just one more example of a fat wealthy union boss trying to create two classes of workers: the pampered, entitled unionized public employee and the hard-working, self-reliant non-unionized taxpayer. There will always be a degree of instability and insecurity in the economy, and it is not possible for taxpayers to completely and indefinitely shelter unionized public employees from that reality. It's time to shift public employees to defined contribution plans and let them take a modicum of responsibility for their own financial security like the rest of us do.

  • a business man
    July 25, 2013 - 06:52

    Sorry, but as a business owner, I have no interest in defining a future benefit for unskilled uneducated workers. In my companies, there is a two tier benefit system. Skilled and educated employees get defined benefit pensions, full health plans, and more perks than they will ever use. The unskilled uneducated workers are paid minimum wage for life with no benefits or health plan. I am generous with those who are important to the company, and overly stingy with the workers who can be replaced easily and who are therefore not important to me. The unskilled are left out of the Christmas so that the executive bonuses can be higher. The reality is that unskilled uneducated workers are not worth a defined benefit plan because they are just too easy to replace. A defined benefit pension should only be given to the workers that an employer does not want to leave.

    • Bob
      July 25, 2013 - 09:19

      Troll Alert

    • Skilled Worker
      July 25, 2013 - 10:16

      Mr Business Man, I am a skilled worker who has many benefits including pension plans, health plans, etc. However, I am ashamed that a business man such as yourself would downgrade the important services that unskilled workers provide. Services such as taking out your garbage!! Would you prefer to hire an Engineer to do these tasks? or is it that you would prefer to pay these workers minimum wage without benefits just so you can keep your profits!! Shame on you, these workers provide meaningful services to companies, have families the same as skilled workers and deserve to be treated with the same respect!! I assume you have many vacancies within your company because I'm sure that if you think unskilled workers are not worth it, you must also have trouble hanging on to workers in the first place.

    • Joe
      July 25, 2013 - 13:41

      I have no interest in supporting unskilled and uneducated business owners. I therefore only buy from national companies and let these unskilled uneducated people sell there crap to themselves.

    • a business man
      July 26, 2013 - 06:25

      Dear Skilled Worker: To answer your questions, I would prefer to pay these workers minimum eage without benefits just so I can keep my profits. As I have said before, this IS what I do. It is the easiest thing to do because just own the company and do nothing regarding the day to day managment. I am a practicing lawyer and my businesses are just investments. I know the unskilled workers provide meaningful services, but their lack of education puts them at a disadvatage that I use to my advantage. I know that without an education, their options are limited, and I know that it is not hard to find someone else to do the work. So I pay minimum wage for life, and those who can find somehting better do. Those that cannot find better stay, and I make money. And yes, the unskilled workers have families, but they are not my family so not my problem. Paying them minimum wage means I can give more to my family. For example, one of my kids goes to school in another province. If I were to pay workers more, then my kid might have to rent. But because I run my businesses in a ruthless but legal manner, I was able to afford to buy my kid a condo. My duty is to my family, no anyone else's. Lastly, I have no vacancies within my company. Rather, I have a stack of resumes from other unskilled or uneducated people who are willing to work for minimum wage. I do have a high turnover, but that is not a problem because it takes 5 minutes to have a workers fully trained. Again, this an unskilled job done by unskilled people, so training costs are minimal. The same cannot be said for a skilled and educated professional. I'll be sure to remember that you are ashamed while I enjoy my 2nd vacation of the summer!

  • J
    July 25, 2013 - 06:34

    Dear Wayne Lucas, The fact that public sector unions suck at the public teat and gutless politicians are unwilling to do anything about it will be the undoing of many a city in the future. If people are not saving enough for retirement then they must assume full responsibility for their actions. I know the phrase Individual Responsibility may be a mouthful for most Newfoundlanders but us individual taxpayers should not be coerced, nay, forced, into paying for benefits for public employees, benefits for which they themselves will never receive in the land of Reality. It is to the point in this country were a public sector job is Gold Plated with benefits for life. Time and time again in this country and especially this province people are going to the Government with their hands out, almost like the Grasshopper and the Ant fable. Someone needs to read up on the decades of incompetent rule that is leading to the downfall of Detroit. Provinces need to become Right to Work much like other US states.

    • SB
      July 25, 2013 - 10:04

      I respect his enthusiasm...and Mr Lucas is indeed fulfilling his role as a union cheerleader. That being said, he completely ignores the role that demographics have played in the exhaustion of Defined Benefit plans. There is no doubt that both the low interest rate environment and lackluster stock market returns have played a role in the demise of DB plans. However - he omits the fact that many of these plans were developed on actuarial models from a different era. In 1990 there was 4 active teachers to 1 retiree. Now it is 1.5:1. The model was designed on a 8:1 ratio! Workers were supposed to draw Retirement incomes for 20 years post retirement, today a largest percentage of DB receiptents are drawing DB public sector pensions longer than they actually worked! There is less money coming in the front door and more going out the back door. Simple math: it does not work. This has caused a ripple effect as pension fund managers have been forced to look for greater returns to deal with this increased pressure...where did they look? The stock market...thus when it crashed it had a huge impact. The point is - we have to look at why fund managers were over invested in that asset class in the first place...you ignored this completely. DBs are on the way out. The numbers back it up, pension policy overhaul will not be too far behind. SB

    • Joe
      July 25, 2013 - 13:36

      It is hard to comment on ignorance and so called facts. The only thing for employees to do is to leave the province and let the "taxpayers" sell to themselves.