Big Three Automakers shift to DC

negotiating-2

The strike deadline for Unifor members at Ford in Canada was 11:59pm on Monday October 31, 2016.  Early Tuesday morning (Nov 1st), about 30 minutes after the deadline, Unifor and Ford announced that they had reached a last minute deal.

I don’t have all the details, but the three key features of the deal as I understand it are a $700 million investment in Ford’s Canadian plants, no concession by the union on lower wages for new part-time workers, and a move away from defined benefit pensions to a defined contribution plan for new employees.

This last move is not surprising because General Motors and Fiat Chrysler both won this concession earlier this year and the union was somewhat committed to ‘pattern bargaining’.  The change to DC is only for new hires, so the DB plan will take decades to wind-down.  Nevertheless, the path is set.

There are two questions that come to my mind with this development.  First, what does this move say about the future of DB plans in the private sector?  Second, what does Unifor’s concession signal for downstream suppliers that also have a unionized workforce organized by Unifor?

The future of DB

Notwithstanding media reporting that might make you think otherwise, DB plans are not evil.  With that said, DB plans are more costly to administer than 30 years ago, largely due to the increased complexity of legislation; plus, the contribution requirements for DB plans are more volatile than 30 years ago, largely due to the rise of solvency funding and the increased volatility of equity investments that often underpin DB pension promises.  In contrast, DC plans have a fixed and predicable costs – something employers value tremendously.

I dream of a world where employees and employers, frustrated with the difficulties inherent in DC plans, return to more modest DB promises with the support of a government willing to help employers manage contribution volatility through thoughtful legislation.  The truth is that a big part of the problem with DB plans is that in today’s economic environment, promises we made 30 years ago just aren’t affordable anymore.  Starting work at age 25 and working for 30 years and then retiring at age 55 doesn’t work when bonds yield 2% and retirees can be expected to have more years in retirement than years working.  2% final average plans with indexing were expensive 30 years ago – today the costs are prohibitive.  Today’s pension promises need to be re-calibrated to today’s reality.

Ontario is currently ‘consulting’ with industry on how to revamp its solvency funding rules.  Quebec has already moved to a new system of funding DB plans which we expect will allow for a smoother pattern of contributions over time.  After 15+ years of complaints from industry professionals and plan sponsors, Ontario finally sees that its strict policy to protect pension promises has failed to actually deliver that protection and in fact has driven employers out of the business of making pension promises, somewhat defeating the purpose of the protection in the first place.  Along with better plan design, improved funding rules are a necessary ingredient to get DB plans back on track.

I don’t expect new legislation to return the DB plan to its former glory – but it can level the playing field with DC plans so that DB again becomes a viable choice for plan sponsors that are not fond of hoping employees make good savings and investment decisions.

Unifor’s strategy

It is hard to know what has changed at Unifor to allow them to negotiate away DB promises that were a central component of contracts for many decades.  What we do know is that it will be hard for Unifor local bargaining committees to dismiss their willingness to let the Big Three move to DC as unimportant.  Smaller employers will be looking for the same relief.

In my mind, Unifor should try to get ahead of the next tier of bargaining by getting ready to offer plan design changes (such as reduced early retirement and plant closure benefits) that can lower the cost as well as cost volatility of its DB plans.  Such a move might postpone a switch to DC which in the end might be in everyone’s interest.

Interesting times ahead.

 

 

Joe Nunes
Joe Nunes
Joseph Nunes, Co-founder and Executive Chairman of Actuarial Solutions Inc, has practiced in the area of pensions and retiree health plans for over 30 years. He has experience with many types of plans including single-employer, multi-employer, private sector, government, unionized, non-unionized, as well as registered and non-registered executive plans.

1 Comment

  1. Avatar Bob says:

    The auto sector has been adjusting its programs for years, this is just the next step and the organizations wish fixed costs so traditional DB schemes are likely going the way of the dinosaur.

    However, one reason is the lack of looking long term, in the 20 year period between 83 and 03, high investment returns and interest rates, lulled most into pensions do not cost much and Freedom 55 was good.

    So early retirement incentives were given away as were pension improvements and sponsors took contribution holidays and we somehow forgot about the baby boom.

    After Massey and White farms and the Chrysler bankruptcy, we should have learned but we did not. Immunization was considered important but when annuity rates were high, none took advantage to de-risk their plans.

    As interest rates fell, we simply said they would nto continue downward and then surprise, surprise, the deficits grew and the volatility due to high numbers fo deferred and retired members meant the costs and volatility increased.

    So the solution is “throw the baby out with the bath water”. Once gone unlikely to return.

    Of course the industry is proposing long term solutions which will “put the final nail in the coffin”. Target benefit plans may be better than DC but I think there are a great many multi ER Target benefit plans out there and they in many cases fell to the same issues.

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