Stelco’s long battle on the pension precipice

Like most 19-year-olds, Gary Howe didn’t pay a great deal of attention to his pension entitlements when he signed up with Stelco Inc. as an apprentice industrial mechanic at its landmark plant in Hamilton, Ont.

“At that age, I was more interested in my wages and how much cash I would have in my pocket,” says Howe.

Almost 40 years later, he thinks of little else, having risen to the rank of president at Local 1005 of the United Steelworkers of America. The union’s defined benefit pension plan has spent the last decade in a state of almost permanent peril, thanks to its position at the heart of Stelco’s multiple bankruptcy proceedings.

Read: Pensions, benefits preserved as Stelco seeks court approval for restructuring plan

With more than 8,000 active and retired members, the union plan is the biggest of Stelco’s four main defined benefit pension plans. At the end of 2015, its unfunded liability stood at $620 million, accounting for the bulk of the company’s overall pension shortfall.

About 1,300 members of United Steelworkers Local 8782, based at Stelco’s newer plant in Nanticoke, Ont., have their own plan, as do non-unionized salaried employees at each of the company’s two major sites.

By the time Howe arrived at Stelco in 1978, the pension plan already had 22 years of history. It had launched in 1956, a decade after Local 1005 first emerged with collective bargaining rights recognition from the company’s management following a brutal, months-long strike.

Early signs of trouble

Business was booming, and the company was just a few years away from hitting its peak of 26,000 employees in 1981. Alarm bells didn’t really begin to ring for Howe until 1996, by which time he had joined the union executive and played a part in negotiating a six-year collective bargaining agreement.

“A big selling point of the agreement for us was that the pension liability was supposed to be paid off during that time,” says Howe.

Read: U.S. Steel Canada acquisition is ‘best opportunity’ for the company and retirees

Just months later, that hope went out the window when Stelco management announced it would take advantage of Regulation 5.1 of Ontario’s Pension Benefits Act. The regulation, enacted by Bob Rae’s NDP government, allowed large companies with pension assets valued at more than $500 million to defer special payments that were due to cover shortfalls in solvency funding levels. Under normal circumstances, employers would have just five years to make up the deficiency, but the regulation instead allowed them to make higher premium payments to the pension benefits guarantee fund, a provincially run insurance program for plans with insolvent sponsors.

Designed to spur growth and preserve jobs in a recession by temporarily relieving companies of their pension funding burden, the measures gained a bad reputation, thanks in part to the fact that three of their main beneficiaries — Stelco, General Motors of Canada Co. and Algoma Steel Inc. — all edged towards bankruptcy at some point.

Read: Union optimistic U.S. Steel agreement could lead to ‘good final deal’ for retirees

“The policy has certainly been credited with creating a situation where companies got into a funding hole that they then couldn’t get out of,” says Toronto pension lawyer James Pierlot. “When you make exceptions to solvency rules and people take advantage of them, there’s going to be a much bigger risk of failure.”

Gary Dallin, a former manager in the metallurgy department at the Hamilton site, is less diplomatic in his assessment. “It was a dumb thing to do,” says Dallin, who now heads the organization for Stelco’s salaried pensioners.

“Had they kept contributing, then when the trouble came, they wouldn’t have looked as though they had so much debt on their books,” he adds.

Pension deficit balloons

Dallin, who started at Stelco in 1965, says he hardly noticed his pension until after he began collecting it in 2001, except maybe during the 1980s when the company transitioned to a non-contributory plan and stopped demanding payments from employees.

However, his retirement coincided with a downturn in the global steel industry, lower interest rates and a further economic recession. Still freed from its pension funding obligations, the solvency deficit in Stelco’s four main defined benefit plans had ballooned to $1.25 billion around the time the company filed for protection under the Companies’ Creditors Arrangement Act in 2004.

Read: U.S. Steel Canada asks court to stop some pension contributions

By the time Stelco finally emerged from bankruptcy protection in 2006, after a winning bid from a union-backed consortium led by investment fund Tricap Management Ltd., it had forfeited its exemption under the pension legislation and immediately injected $400 million into the pension funds. According to an actuarial valuation for the Local 1005 pension plan, a special agreement reached in conjunction with the 2006 proceedings provided that the company would contribute a fixed amount of $65 million per year from 2008-10. Annual payments then rose to $70 million between 2011 and 2015 under the restructuring deal reached by Tricap and the provincial government.

New buyer, new troubles

Pittsburgh-based United States Steel Corp. entered the fray in 2007, winning a bidding war to take the company off Tricap’s hands for US$1.2 billion, while also assuming its existing debt of almost US$800 million.

Yet another global downturn had a big impact on the company — then known as U.S. Steel Canada Inc. — with demand plummeting and the workforce continuing to dwindle. The unions’ round of collective bargaining with the new American owners coincided with the parent company signalling second thoughts about the deal it had gotten itself into north of the border. Lockouts followed at both major sites, and the union locals each agreed to close their defined benefit pension plans to new members as part of a deal to end the impasse. Since late 2011, newly hired employees have enrolled in group registered retirement savings plans administered by the union with contributions from the employer.

Bill Ferguson, president of Local 8782, says the new arrangement has made recruitment and retention of skilled tradespeople a challenge.

Read: Ontario objects to U.S. Steel’s financing plan

“It gave workers mobility, and a lot of them have left to go out West to the oilfields,” he says.

In late 2014, U.S. Steel placed its Canadian arm into creditor protection yet again, declaring an $800-million funding hole in its pension plans. By the end of 2014, actuarial reports show the deficiency across all four defined benefit plans had risen to just over $1 billion, with an average solvency funding ratio of 74.8 per cent.

Another potential saviour

In December 2016, the provincial government announced its support for a new restructuring deal that would see Miami-based mining company Bedrock Industries LP commit to keeping about 2,100 jobs at the Hamilton and Lake Erie plants combined.

As part of the deal, Bedrock won’t have to cover the existing liabilities in the pension plans; however, it will pay up to $430 million into them over the next 20 years, including $30 million up front and a minimum of $10 million per year for the first five years, followed by $15 million for the following 15 years. The annual amounts could escalate, depending on company performance.

The agreement has split the union locals, with Local 1005 opposing the deal and Local 8782 backing it. The City of Hamilton, owed millions in unpaid property taxes, has also voiced its displeasure.

Read: Judge rules against reinstating U.S. Steel Canada retiree benefits

Even if Stelco squeezes the maximum value out of its pension contributions, Marvin Ryder, a professor at McMaster University’s DeGroote School of Business, says it won’t come close to covering the current deficit. However, if financial markets improve over the next couple of decades, he says the plans may see a boost to their solvency levels.

As things stand, Ryder expects a bankruptcy judge to ratify the Bedrock deal, despite the objections. The city can pursue its claims after the sale, he says, while Local 1005 has little leverage without another bid on the table.

“If the Bedrock deal handles all the issues facing the creditors, then the judge will weigh it up compared with what they can get from liquidation,” says Ryder. “In that situation, I think the union’s concerns will be given short shrift, and it’s highly unlikely any other white knight comes riding over the hill to save them.”

About half of Stelco’s remaining employees belong to one of the company’s four main defined benefit plans, which entitles them to a basic pension of $58 per month for every year of service up to 40 years, meaning a 30-year employee gets about $21,000 per year. The plan also provides for a supplemental pension calculated at $30 per month for each year of service (up to 30 years) but reduced by old-age security and Canada Pension Plan benefits.

Read: ‘Life and death matters’ at stake as U.S. Steel retirees seek benefits reinstatement

In the event an insolvency leads to winding up the pension plans, the provincial pension benefits guarantee fund would cover the shortfall for the first $12,000 of beneficiaries’ annual pensions. Anything above that would take a cut proportional to the final solvency ratio of the plans.

A 2015 economic study revealed the devastating impact a complete collapse of Stelco could have on the region. According to the report, up to 8,600 Stelco pensioners live in the city, accounting for 6.3 per cent of its residents over age 60. The average Local 1005 retiree in the city collects about $16,000 per year and would stand to lose just over $4,000 of that if the company became insolvent.

So far, no one has seen an interruption to pension benefits, although U.S. Steel did win court approval in 2015 to halt payments for post-employment benefits, such as drug and dental care, that were costing the company about $3.5 million per month. The Bedrock deal includes provisions to fund post-employment benefits through a new trust or corporate entity, but the proposal has upset Howe because he says projections suggest it will only raise enough to cover 70 per cent of the needs of Local 1005 members, compared with 100 per cent for Local 8782.

Lessons learned

Pierlot says the Stelco episode and other large bankruptcies involving underfunded plans should prompt a change in the way organizations present defined benefit pension plans to employees.

“The key lesson is that there are no certainties, even for public pensions. If you’d asked a Greek public servant a decade ago whether they thought they would lose their pension, they would probably have laughed,” he says. “What we need is a more mature and honest discussion about risk. In the case of DB plans, that means it’s not a good idea to communicate that the pension is completely secure or to make hard promises about the amount it will deliver.”

Read: U.S. Steel accused of ‘oppressive conduct’ as pension fight heats up

Paul Timmins, senior consulting lawyer at Willis Towers Watson in Toronto, says crises such as those surrounding the pensions at Stelco have helped precipitate a move away from the traditional solvency funding rules nationwide.

“In this new environment, provincial governments are acknowledging that solvency funding, as it was originally conceived, no longer works well. Cases like Stelco, that push towards the worst-case scenario, have helped prompt the realization that a new funding regime is needed.”

Michael McKiernan is a freelance writer based in St. Catharines, Ont.

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