The Stel Salaried Pensioners Organization wishes to thank The Hamilton Spectator for permission to post the following article by Business Reporter Steve Arnold published in the December 22, 2003 edition
Dec. 22, 12:35 EDT
Shortfalls in the billions of dollars
have been caused by weak stock market performance and a wave of early
retirements
Steve Arnold
The Hamilton Spectator
Brian Briessette, Reg Tyleman and Iain Ross
had hoped for a secure retirement after 30 years in the mill and offices of a
wire drawing plant.
Those dreams were shattered by the
bankruptcy of Frost Fence, a failure which left hundreds of retired workers to
face advancing age without the health insurance benefits they thought they had
purchased with a lifetime of labour.
Briessette, Tyleman and Ross were among the
hundreds of former Frost workers whose pensions were cut by 25 per cent when
the company went broke without enough money in the fund to cover future
obligations.
They also lost the extended health care
coverage -- insurance for drugs and other costs -- that had been a critical
part of their retirement hopes.
"I probably will have to go back to the
workforce but I don't have a trade, so all I'm likely to get is minimum
wage," Briessette told The Spectator in July. "I scan the paper, but
when you're 55 there's not a great deal out there."
For Tyleman and Ross, who toiled in Frost's
management ranks for a combined total of 75 years, the loss of those promised
benefits has been even more troubling. They and their families face cancer,
blood disorders, high blood pressure, asthma and diabetes, which drain hundreds
of dollars a month from their fixed incomes.
"The older you get, the more dependent
you are on these kinds of benefits," Tyleman said in a recent interview.
"Not having them has become a major, major thing in my household. I may
have to go back to work, get a part-time job to pay for everything."
Across North America, several hundred
thousand versions of those stories are being written every year as battered
manufacturers struggle to deal with soaring bills for pension and other
retirement benefits.
In the United States alone, in the last five
years more than 200,000 retired steelworkers have been cut loose from the
pension and health benefits they had been promised after their former employers
went bankrupt or used court-supervised creditor protection to shed such
"legacy" costs.
The situation hasn't been as severe in
Canada, but experts warn a similar crisis could be coming as pension plans
accumulate ever growing unfunded liabilities under the double blows of poor
stock market returns and a wave of early retirements.
"The stock markets have just been awful
in the last few years and almost all pension funds count on some reasonable
rate of return in order to stay solvent," said Sherman Cheung, professor
of finance at McMaster University's business school. "Pension plan balance
sheets have been hit pretty hard in the last few years," acknowledged Bob
Baldwin, director of social and economic policy for the Canadian Labour
Congress.
"We're not standing on the edge of a
precipice in danger of falling off yet. This is a problem that's still
manageable, if people want to manage it." Recent events surrounding Stelco
Inc. illustrate the extent of the problem. The company, which currently has
9,750 active workers in its mills and offices to support 12,800 retirees,
expects about 600 workers to retire in each of the next two years, up from a
recent average of 350 a year. Each retiree costs the company about $40,000 a
year, roughly half the cost of an active employee.
The problem facing the money-losing
steelmaker is that its 17 pension funds, with assets of $2.3 billion, are $650
million short of what's needed to meet all current and future obligations. The
fund which pays the health benefits of retirees is more than $1 billion short
and will draw $100 million in cash from the company's bottom line next year.
Ontario's pension regulator, the Financial
Services Commission of Ontario, would normally require that shortfall to be
made up over five years -- a cost of $130 million annually -- but with $168
million in losses this year, many fear the burden of such costs could drive
Stelco into bankruptcy or a court-supervised restructuring. That's the process
American steel companies used to shed legacy costs and trim up to $60 US per
ton from their costs of production.
"For firms like Stelco that could be a
real problem," Cheung said. "Stelco just can't be forced to make up
that deficit in a short period of time."
"Stelco certainly isn't an isolated
case," said Ian Howcroft, Ontario vice-president of Canadian Manufacturers
and Exporters. "A lot of companies are facing difficult times for a
variety of reasons and legacy costs are certainly one of them.''
In July, the Dominion Bond Rating Service
studied 263 pension plans and found 84 per cent had a funding deficit at the
end of 2002. About a quarter had assets worth less than 70 per cent of
obligations.
Among specific examples, Bombardier Inc.'s
pension is $2.6 billion underfunded with assets equal to only 54 per cent of
obligations. Air Canada had a $1.8 billion pension shortfall last year, while
Nortel's shortfall was $1.8 billion US with assets worth only 71 per cent of
obligations.
In the U.S., a senior General Motors
executive told a congressional committee last year the company has outstanding
pension fund liabilities of $52.5 billion US and spends over $3 billion a year
in health care costs for its hourly workforce, adding about $800 to the cost of
each vehicle it makes.
"At a time when we are competing with
car companies all over the world that have little or no retiree health
liabilities, this represents an extraordinary and sometimes excessively
burdensome challenge," said L. L. ''Woody'' Williams, executive director
of health care initiatives. The number of GM retirees has increased from
340,000 to 425,000 between 1991 and 2001. With an active workforce of 181,000,
the company now has one active employee for every 2.3 retirees.
In the U.S. steel industry, the ratio of
employees to retirees has reached as high as 1:5 and for some companies, such
as bankrupt Bethlehem Steel, it's 1:7. That ratio "further threatens
firms' solvency and the retirement security of manufacturing employees and
retirees," warned the Washington-based Economics Policy Institute.
Sym Gill, director of the pension benefits
department of the Canadian Auto Workers Union, said similar problems are being
experienced throughout the "mature" auto production sector in Canada,
where the long-established Big Three are carrying pension costs their more
recently arrived foreign competitors are spared. Meeting part of that
obligation in the U.S. cost GM $18.5 billion this year. Most of the money came
from a bond sale, while $4 billion came from the sale of a division.
"They still owe the money, but now they
owe it to bondholders rather than pensioners and it has a whole different
effect on their cash flow," Gill said.
While no one has yet offered a comprehensive
package of policies for overcoming the legacy cost problem, some suggestions
have been offered for tackling parts of the issue. Last year, for example,
Congressmen John Dingell (D-Mich.) and Ray LaHood (R-Ill.) co-sponsored a bill
they entitled the Steel Industry Legacy Relief Act.
It proposed establishing a U.S. federal
trust fund to provide health and prescription drug benefits coverage to steel
industry retirees whose employers had permanently closed or been acquired by
another company. The fund would have been financed by a surcharge on steel shipped
by acquired companies, assets of the acquired companies and tariffs imposed on
imported steel.
Any shortfall would be covered by the
federal government. A similar proposal was raised in the Senate by Sen. Jay
Rockefeller (D-W.Va.). Both initiatives were blocked by the Bush
administration, which offered instead a complicated tax credit program to help
steel retirees buy private health insurance. The deal required the retirees to
pay up to one-third of the premium costs out-of-pocket.
Other suggestions have focused on changing
the regulations that require pension fund shortfalls to be made up over
relatively short periods, while others have called for less optimistic
assumptions on the financing of pension plans.
Stelco's pension plans, for example, are based
on the assumption the pool of money will earn an average return of 7.75 per
cent in the stock markets. In 2001, the pool earned less than half of 1 per
cent and in 2002 it lost just under 3 per cent.
Other suggestions include greater public
spending on programs such as medicare and sharp increases in the protection
offered by the provincial Pension Benefits Guarantee Fund.
That program, financed by a levy on pension
plans, will "top up" pension payments cut because a plan is
underfunded. Those payments will only take pension cheques to a maximum of
$1,000 a month.
The labour movement has argued it should be
$2,500 a month.
sarnold@thespec.com
905-526-3496