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© Copyright 2000 Rogers Media. The following article first appeared in the December 2000 edition of
BENEFITS CANADA magazine.
Crown jewel
Ottawa is finally cutting the Canada Post pension plan loose. But is a defined benefit arrangement
the appropriate solution?
By Dian Cohen
The Canadian government has finally stepped into the last half of the 20th century by mandating that
several of its subsidiaries--Canada Post being the latest--must establish their own defined benefit (DB)
pension plans with money invested in capital markets.
When Canada Post was converted from a department of the government into a Crown corporation back in 1981,
Ottawa intended it to have an independent pension and benefits arrangement.
According to government insiders, if Canada Post was commercialized as for example NAV Canada was just a
few years ago, the separation from government would have included an independent benefits and pension plan.
But it's taken Ottawa 20 years to get around to Canada Post, and today a DB plan is probably not the best
solution.
Twenty years ago, when the impact of the new economy on traditional institutional arrangements was not
quite as clear, DB plans--in which the employer makes all the decisions about how and how much employees
should save for retirement--were still considered in keeping with the times, if not forward thinking. Not
so today.
DB plans are becoming a relic of the old economy. They are a legacy system in insurance companies, banks,
unionized firms of all sorts and the public sector. Even old, new economy companies like Bell and Nortel
had DB plans which have been converted to defined contribution (DC) plans, but are still part of their
legacy.
Half of the membership in DB plans is public sector employees, and virtually the only DB plans being
created today are in the public sector. Almost every other plan sponsor is moving to DC arrangements,
including money purchase pension plans and group registered retirement savings plans.
So now, 20 years after the fact, the government has stuck to its original game plan to the end play. And
what an end play it is. Canada's Post's pension plan may be an ordinary DB plan, but it controls a massive
amount of money to keep its promise to the 50,000-plus membership.
A whopping $7 billion will eventually be placed in the world's capital markets. I say, eventually, because
trying to put even half that amount into the Canadian capital market would cause a valuation tidal wave
felt from sea to sea.
Up to now, Canada Post's pension plan was organized on a pay-as-you-go basis, which in reality meant a lot
of bookkeeping entries and take-from-Peter-to-pay-Paul activity. This is because the federal government has
a $500 to $600 billion debt, plus an equivalent amount of unfunded pension liabilities. Ottawa is going to
have to write a cheque to the new plan, since it will receive cash to begin its investment activities.
POSITIVE IMPACT
Just how long it will take to place all the money is confidential, but the likelihood is two to three
years, with the Canadian allotment taking the most time. Once the investment managers are chosen, placing a
billion or so in either the U.S. or EAFE markets is a drop in the bucket. In Canada, however, they will be
much more cautious.
Despite the fact that DB is an old style structure, spinning out the pension plans of Canada Post and the
others--including the Public Service Alliance, the RCMP and the Armed Forces--has had some positive
effects. The competition has been a godsend for the 200,000-plus public sector employees still stuck in the
Public Service Superannuation Account.
Insiders say the Treasury Board has become more sensitive to its clients' needs and, as of late, become
anxious to meet and greet employees and pensioners, to do a better job of communicating with them and
generally to have a higher profile with the people on whose behalf it labours.
That in itself is justification for, if not the purpose of, the spinout. It remains to be seen though how
smooth the transition to independent operation and insightful investment goes.
Dian Cohen is an economics consultant with a special interest in pension issues.
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