Table for Two

Across the country, the position of employers in the process of bargaining a new collective agreement is remarkably similar: they’re seeking concessions on pensions.

The reason behind this position is well known. 2008 will go down in history as the year of the worst equity market since 1929, in reaction to the meltdown of the U.S. housing market and the near collapse of some of the world’s leading financial institutions. Private and public pension plans suffered unprecedented losses. For most Canadian employers that sponsor defined benefit (DB) pension plans, this will result in enormous contribution increases in the immediate future, at a time when many businesses are struggling just to stay afloat in the current economy and for years to come.

Central Concessions
Although employers’ desires for concessions on pension matters are universal, the specific concessions they are seeking can vary significantly. In theory, the most significant change would be full termination of an existing pension plan without the introduction of a replacement arrangement, but most employers are not going this far. Instead, many DB plan sponsors want to transition to defined contribution (DC) arrangements.

In many cases, the implementation of DC arrangements is the central issue on the bargaining table in 2009. The trend to DC plans is already well established and steady. However, the 2008 market meltdown seems to have pushed many more employers with unionized workplaces to seek to terminate long-standing DB arrangements and implement DC plans instead.

Employers generally encounter significant opposition to such changes, as many unions strongly prefer DB plans and are prepared to fight for them. Over the past few months, many high-profile negotiations have broken down over a union’s refusal to accept a proposal to introduce a DC plan—even when the DC arrangement is only for new employees.

A seemingly less drastic measure, which can nevertheless significantly curtail employers’ pension costs, is to reduce benefits under a continuing plan on a go-forward basis. Such benefit reductions can take the form of a reduced basic benefit formula (e.g., a move from 1.5% final average earnings to 1% final average earnings). A more common proposed change is the elimination of ancillary benefits (e.g., bridge benefits), early retirement enhancements and ad hoc indexing. Introducing increased employee contributions is another option that employers are presenting to unions.

Of course, there may be legal restrictions on an employer’s authority to make plan changes regardless of whether or not the union is amenable to them. Employers should seek advice to determine if any legal impediments exist before tabling a proposal to the union.

In light of recent changes to pension legislation, access to solvency funding relief is a new topic being negotiated at the bargaining table. Under Ontario and federal pension regimes, access to solvency funding relief is only available with retiree and member consent (or, more technically, non-objection). When employees are unionized, member consent must be obtained through the union.

Although the regulations effectively set maximum limits on the extension period of the solvency funding relief, we are seeing unions negotiate reductions to the maximum funding periods in exchange for their consent. For example, while the Ontario and federal regulations now allow special payments to be paid over a 10-year period (a five-year extension over the current rules), unions are, in some cases, negotiating a shorter seven- or eight-year extension period in exchange for their consent.

The economic downturn has also resulted in a number of cases in which employers and unions have come to the bargaining table specifically to discuss pensions. Funding relief outside of the scope of the current legislative regime has been negotiated, and the parties have then sought the introduction of plan-specific changes to the governing funding regulations.

Employer Tips and Traps
While each employer/union relationship is unique, all employers would be well advised to consider the following strategies before tabling pension concessions as part of their overall proposals to be bargained with the union.

Prepare in advance. Set a clear “game plan” and be ready to discuss and debate the fine strokes. With respect to the rollout of a DC proposal, the employer should prepare, in advance, the details regarding the design of the new DC arrangement and how employees’ existing DB benefits will be affected. For example, what will be the new contribution rate? Will different employer contribution rates apply to existing employees versus new employees? Will DB benefits be frozen and DC benefits offered for future service? Will employees be given the option to convert their accrued DB benefits to lump sum values to be deposited into their DC accounts?

Clearly explain why the change is needed. As part of bargaining, employers need to provide enough information to the union to support their case for the proposed change. Faced with the possibility of future layoffs, terminations or the total collapse of the employer’s business, a union may be more open to accepting changes to a long-standing DB plan that, in prior years, were not open to discussion.

Educate the union. Educating the union about the company’s proposal will allow for a meaningful discussion of the issues, a precursor to reaching a consensus. When a DC arrangement is proposed, the union needs to understand the implications of the change. With the assistance of an actuary, the company should develop and disclose clear examples of the impact of the change on employees’ future benefits.

With respect to a solvency funding relief proposal, an employer should consider preparing a detailed question-and-answer document to give to the union. In addition to the information that must be disclosed under the applicable regulations, the document should include topics such as plan details; a primer on registered pension plan funding rules; an explanation of the valuation process; details regarding the plan’s current and historic funded status; a summary of the company’s contribution obligation with and without solvency funding relief; an overview of the pension fund’s current investment mix; and an overview of plan governance. An employer may also want to consider making an actuary available to the union to discuss these topics. Educating the union will allow it to educate its membership, which will be necessary to finalize the negotiated deal.

Communicate in a clear and accurate manner. Employers need to be careful not to make any misrepresentations, especially in respect of the risks associated with DC plans as opposed to DB plans. Misleading or overreaching statements can expose the employer to future legal claims.

Be careful not to expand the scope of future negotiations. In most cases, an employer’s funding obligation in relation to a DB plan is not an issue that is negotiated with the union. Typically, benefits levels, not contributions, are negotiated. In seeking a union’s consent to a solvency funding extension, the employer is effectively putting DB funding on the table. Employers will need to take steps to ensure that, in seeking union consent to an extended amortization period, they do not inadvertently open pension funding issues to future negotiations.

Certainly, the enormous DB pension contributions now required by many employers as a result of the 2008 market meltdown are making pensions the key issue at virtually all 2009 bargaining tables.

The extent to which employers will be successful in seeking pension concessions—and whether more employers will be successful in 2009 in implementing DC arrangements for their unionized workforce—remains to be seen.

Susan Nickerson and Terra Klinck are partners in the pension and benefits practice group at Hicks Morley in Toronto.
susan-nickerson@hicksmorley.com
terra-klinck@hicksmorley.com

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