SPECIAL REPORT

THE FIGHT FOR FUNDS

MORE THAN $200 BILLION IS ON THE LINE

BARBARA WICKENS March 2 1992
SPECIAL REPORT

THE FIGHT FOR FUNDS

MORE THAN $200 BILLION IS ON THE LINE

BARBARA WICKENS March 2 1992

THE FIGHT FOR FUNDS

SPECIAL REPORT

MORE THAN $200 BILLION IS ON THE LINE

Before he retired in 1969 after 21 years in the National Hockey League, Allan Stanley had a career that would make most players proud. The Timmins, Ont.-born defenceman played for the Toronto Maple Leafs in their glory days in the 1960s, when the team won four Stanley Cups. In 1981, he was inducted into the Hockey Hall of Fame. Yet, at 65, he collects an annual pension of less than $12,000 for his more than two decades in professional hockey. “When we were playing,” Stanley told Maclean’s,

“most of us never gave our pensions much thought. We had an annual visit from [league president] Clarence Campbell, who told us what a wonderful pension plan it was.” It is an assessment that Stanley does not share. In April, 1991, he, Gordie Howe, Bobby Hull and four other former NHL players launched a suit in the Ontario Court of Justice against the league’s Pension Society, Manufacturers’ Life Insurance Co. of Toronto, which administers the NHL’s $32-million pension fund, and the owners of all 22 league teams. Their goal: to recover $28.8 million that, the suit alleges, the NHL owners withdrew from the plan during the 1980s. Two months later, two retired players living in the United States launched a similar suit. Neither case has yet reached trial, but the issue at the heart of both is the same: who really owns the money in private pension funds?

Shortcomings: In fact, the disputes are simply the latest skirmishes in the evolution of private pensions from simple charity on the part of paternalistic employers to critical sources of retirement income for an estimated five million Canadians—about 40 per cent of all employed workers. At stake is as much as $200 billion that workers and their employees have invested in plans managed by such trustees as Manufacturers’ Life. And beyond the question of who has the right to that money and any interest that it might earn, the hockey players’ suits underscore other shortcomings that critics say plague the current system of private pensions. While union leaders complain that not enough people are covered by employersponsored plans, business executives protest that such plans have become awkward and too costly to administer. “A lot of employers are

fed up,” said Keith Ambachtsteer, the editor of Canadian Investment Review. “Employees don’t appreciate what they are getting.” Pensions first erupted into controversy in the 1980s. The spark that ignited the debate: the substantial surpluses that inflation and a booming stock market helped create in many private pension funds. As the holdings in many funds grew faster than their associated plans’ anticipated payouts to their members, company managers began taking advantage of the surpluses by withdrawing the money and using it for corporate purposes. The issue surged into the limelight in 1985, when unionized employees challenged the right of Torontobased Dominion Stores Ltd. to remove $60 million from the food retailer’s pension plan. The following year, the Ontario Supreme Court ordered Dominion to return $38 million to the plan. The company appealed that ruling, but later reached an out-of-court settlement

with its employees, agreeing to pay them $37 million, including $5 million in compensation for laid-off workers.

The controversy that the Dominion case prompted continues to simmer. In 1988, the legislatures of Ontario and Quebec placed a moratorium on withdrawals by employers from pension plans in those provinces, while their governments considered new legislation. Neither province has yet enacted new laws. But while the moratoriums are in force, companies whose pension funds develop surpluses may only take a so-called contributions holiday—in effect, using the funds’ extra earnings to replace their own contributions to the plans.

Union spokesmen say that the provincial moratoriums are inadequate. Surpluses, they insist, belong solely to pension-plan members. “Pensions are essentially deferred wages,” said Michael Sheridan, a researcher with the Canadian Labour Congress in Ottawa. “Instead of taking that money as wages, that’s your investment.” In the unionist’s opinion, any pension-fund surpluses should be used to enrich workers, not their employers, through improvements in severance pay or training programs.

Sheridan’s view is unpopular in corporate boardrooms. Most business managers say that employees are entitled only to the specific benefits their plan provides. Said Jay Shecter, vice-president of finance for Montreal-based Joseph E. Seagram & Sons Ltd., whose private pension plan covers 2,000 active and retired members: “If the union negotiates a $20an-hour wage, and the company has a good year, they don’t come back and demand $25. Why, when it comes to pensions, do they suddenly think that they are entitled to more than they were promised?” Shecter added that many funds now have surpluses because the administrators that employers hired were prudent in how they invested the pension portfolio. “If employers are responsible for providing the benefits and for covering any deficits when they arise,” he added, “surely it is only equitable if the results of overproviding are in their hands.”

Private pension plans contain other sources of friction.

Many derive from the expectations of legislators who, during the 1950s and 1960s, first enacted laws to formalize the previously unregulated private pension system.

Underlying those laws was the assumption that private pensions would become one of three main sources of retirement income for Canadians—along with the public -

Canada Pension Plan and private savings. Critics contend that private plans have never lived up to that role, in part because fewer than half of employed Canadians are members of them. Indeed, if the self-employed, unpaid family workers and the unemployed are included, private pension coverage drops to 38 per cent of the workforce.

Inequities: Differences among private pension plans compound the inequities. Ninety per cent of such plans are so-called defined-benefit plans, under which employers offer their employees a specified retirement income or a set percentage of their working income multiplied by the number of years they have contributed to the plan. (An employee with a two-per-cent defined-benefit plan who has been a member for 35 years would receive a pension of 70 per cent [2 X 35] of his previous earnings.) But different plans base their calculation of the amount that pensioners will receive on differ-

ent definitions of “earnings.” The most generous apply the percentage calculation to an employee’s highest earnings (usually their three or five best years); the least generous base the calculation on average earnings over a lifetime.

Variations in provincial regulations can contribute to the uneven protection that private plans afford Canadians. Typically, an Ontariobased worker for a national company becomes fully entitled to pension benefits, called “vesting,” after just two years of membership in a

plan, while his counterpart in Alberta must work for five years before he is vested.

Partly to address such problems, a growing number of companies now offer their employees so-called money-purchase plans, under which employer and employee each contribute an equal percentage of the employee’s salary to an investment fund. At retirement, either the worker or the plan administrator uses the accumulated contributions and interest to buy an annuity for the retiree. Such plans are easier to administer than defined-benefit plans and offer employees a greater choice of how to invest their retirement fund. But they also represent a gamble for the employee: if interest rates are low when he reaches retirement age, the pension annuity will yield correspondingly low payments.

In the face of such widespread concerns, a growing number of pension experts are urging managers and their employees to adopt di-

rect—and shared—responsibility for pension funds. When an equal number of company and union representatives administer pension funds, say advocates, they are able to agree about such issues as pension-fund surpluses before conflicts arise. Argues Ambachtsteer, for one: “It gets the whole arrangement out of the adversarial mode and gets people to recognize the co-operative effort that is needed to generate retirement incomes.”

Such plans are especially popular in indus tries like construction and forestry, with large

workers who move frequently from employer to employer. In British Columbia, several groups of employers in the construction industry have banded together with trade unions to launch jointly managed pension funds that offer, among other things, greater pension portability for workers in that volatile business. Said Gerald Stoney, a vice-president of the IWA-Canada woodworkers union in Vancouver: “If I get laid off from one employer, as long as I get rehired within the next two years, I just carry on.” Innovations: The co-operative approach to pension-fund management has produced some surprising innovations. In the case of some West Coastbased unions, taking a hand in managing their members’ pension funds has led to a new role as real estate developers. William Clark, who was president of the Vancouver-based Telecommunications Workers Union from 1980 to 1987, convinced 12 other unions to join his own in funding a $16.3-million real estate development that would not only provide a secure return on investment for all their pension plans, but also create work for union members. After a successful initial venture into condominium construction near the former site of Expo 86, the group is now building a 29storey apartment tower that it plans to retain as an income property. At

least three other pension-financed real estate projects are also under development in the province. And Clark provides a firmly optimistic assessment of their future. “When you are buying land, there is little risk if you’re not debt-financing,” he noted, adding: “As long as you are using your own funds, you can wait out any slump in real estate values.”

Ironically for the NHL oldtimers, however, they are now fighting to regain the same measure of control over their pension-fund investments that Clark’s union members enjoy. When the league established its pension plan in 1947, players initially served as trustees. After 1969, however, NHL owners took full responsibility for the fund. Now, Stanley and his fellow former players are determined to take control of the play back—at least as far as their pension is concerned.

BARBARA WICKENS