Today the strike mandate for CUPW expires in their contract negotiations with Canada Post Corporation. One of the show stoppers is the corporation's intent to wrap up the defined benefit plan and replace it with a defined contribution plan. This has been a long time theme in the private sector where defined benefit plans have now become virtually extinct. Canada Post Corp. points to a substantial deficit in the plan as the reason for this action. However, it is not widely known that these deficits have occurred due to falling interest rates (not to be confused with rates of return on the fund) which are used in a bit of wizardry to calculate the net present value of future liabilities.
Here's how it works. Let's say a worker earns $50,000 per year and the intended pension benefit is 70 per cent of final earnings ($35,000). How much money is required to pay this benefit for the average lifespan, say 25 years?
It depends how much interest is earned on the money during the payout period. At five per cent you'd need around $475,000, but at three pre cent you'd need about $550,000.
You can see that by lowering the interest rate presumption by two per cent an additional $75,000 is needed to fund the same benefit. Now multiply this by 30,000 workers and you get a $2.25 billion deficit. Remember, this has nothing to do with the actual rate of return the fund is earning.
In addition to the effect of falling interest rates today, in the past when interest rates were higher the same method was used to calculate surpluses which many employers either scooped out directly or gave themselves premium holidays to reclaim the money.
Currently, there is a long overdue initiative to restructure CPP which will mean higher contribution rates for workers and employers. The shift from defined benefit to defined contribution pension plans typically requires workers to contribute a percentage of pay which the employer will match. Oftentimes these programs are voluntary. I haven't seen any figures showing participation rates, but given the fact that we are regularly told in the media and by the Bank of Canada that Canadians have too much debt and aren't saving enough, I'll bet not too many defined benefit accounts are fully funded. In addition I would say that most of these defined benefit plans are underfunded because a contribution rate of 15 per cent of pay and a rate of return of at least five per cent for 30 years would be required to fund a 70 per cent of final pay plan.
It should also be noted that if workers in Canada suddenly stopped overspending and balanced their own personal budgets then salted away 15 per cent of their earnings for retirement there would be a significant drop in consumption spending - enough to damage the economy.
Roy Olsen, a happy Telecommunication Workers Union retiree, BA economics and political science, UNBC
Prince George
