From: cbbrowne@csi.uottawa.ca (Christopher Browne)
Subject: Pension Plans
Organization: Dept. of Computer Science, University of Ottawa
Date: Thu, 8 Oct 92 19:02:52 GMT

In article <6OCT199212552790@jetson.uh.edu> schieber@jetson.uh.edu (Schieber, Jay D.) writes:
>Doesn't Canada have the same problem as the states in this regard?
>Over here south of the border, we have employers unilaterally 
>pilfering and destroying pension funds in large numbers.  Apparently,
>the courts so far have determined that it is all perfectly legal,
>and the employees have no rights to cry foul.

"Destroy": 1) to ruin the structure, organic existence, or condition of;
2) to put out of existence

Which one of these definitions are you referring to?

If you're referring to "put out of existence", I'm sure we would have
heard about the pension funds that were being completely liquidated.
You MUST be referring to the meaning of "ruination."

To head back to some FINANCIAL PRINCIPLES:

There are TWO kinds of pension funds:
a) Defined Contribution plans.

In these plans, the employee and employer both contribute funding.
ALL of the money vests directly to the employee; so does the
investment risk.

At the end of the career, the benefits are based on the employee's
share of the fund; if your share grew to a big $50,000, then you get
$50,000.  If it grew to $500,000, then it's all yours as well.  There
is NO guarantee of any particular level of pension BENEFITS.

This sort of plan allows employees to take investment risks; they can
WIN if the fund invests the money wisely; they can LOSE if the
investments go bad.  

And once the money is in the plan, the company is (fiduciarily
speaking) out of the picture.  Companies are NOT permitted to dip
their hands "into the till" in this case.  It is very common in such
cases for the funds to be invested out through insurance/trust
companies.  And the company has neither responsibility nor risk
associated with the money once it's out of their hands.

An RRSP is one of the forms that this sort of plan can take.  It's
notable that your employer has NO right to touch your RRSP.  In fact,
your employer probably doesn't know anything about your RRSP.  And
since you're responsible for all of the associated risks, they don't
CARE.  And if they DID know about it, it could be considered a breach
of privacy.

b) Defined Benefit plans.

In this sort of plan, you as an employee would be given the right to
some predefined benefit level.  A typical level is something like 60%
of the average earnings of your best 6 years.  (Something roughly
similar to this is how PSAC pensions are determined.)

In this case, the company is responsible for the investment risk
instead of you.  If the money that they put into the fund appreciates
slowly, then they'll have to pay through the nose for your pension
down the road.

If they get a REALLY GOOD rate of return, then there may be more money
in the fund than is necessary to properly fund the pensions.

How about a "for instance", just to make it more realistic.

I worked on the audit of a Defined Benefit pension fund a couple of
years ago (a truly microscopic one - there's only about 3 people still
involved with it).  This fund had something like $600,000 dollars in
it; the investments had turned out really well, and based on the
agreed-on benefits, there was a fairly hefty surplus.  For various
reasons, they won't be adding anyone to the plan (can't - due to legal
restrictions).  But they also can't pay out the $600K.

If all 3 people were collecting (only one was back then), the defined
benefits would total about $2000 per month.  The fund is EARNING over
$5K per month.  So what to do?

Based on what everyone agreed on, the fund will be earning $3K per
month more than it pays out.  And since those people will eventually
stop collecting, there will be this big fund "left over."

According to the law, the excess funds will go back to the company.
The company:
  a) Contributed the funds
  b) Did the work of managing the funds
  c) Took the risk that if the fund "ran out", they'd have to pay the
     employees anyways

The employees have no claim on these funds; not legally, and really
not even morally.

The complaints of "pension skimming" don't have a legal leg to stand
on, other than in cases of clear FRAUD.  (I'm not talking about "Oh,
I'm angry that they did something, and I'll call it fraud.  I think it
was immoral, so I'll call it a crime."  I'm talking about the specific
breaking of the law; using explicit misrepresentation of the truth in
order to induce the removal of funds from a pension fund.  Using one's
signing authority to remove money, without the legal permission, for
instance.)

In the above case, it's pretty clear; there's eventually going to be a
wind-up of the pension fund, and there will be money left over.

It is less obvious when we're talking about a $400 million fund, to
which more members are being added all the time.  But the issue
remains the same:

In a defined benefit plan, the investment risk remains in the hands of
the company.  And this goes BOTH WAYS.

If the fund "loses money" (or doesn't make enough), the company will
have to pay up.  This has happened.

If the fund makes a "windfall", then it's correspondingly fair for the
company to benefit from that.

If you think it's NOT, then I suggest that you start the fight to
stamp out defined benefit pension plans.

The BENEFIT to employees of defined benefit pension plans is the fact
that they don't have to worry about how well/badly the pension fund
does (so long as it's well enough that the company can eventually pay
the pension).

The COST to employees is that they're unable to reap windfalls as
well.  If you've given up the risk, what gives you the right to demand
any of the rewards associated with that risk?

The whole POINT of a defined benefit pension plan is the fact that the
benefits are SET.  They don't CHANGE.  They're not going down.
They're also not going up.  (At least, not beyond the "COLA/best 6
year/whatever else went into the agreement" rates.)

NOTE:  The companies run some BIG risks when they offer defined
benefit pension plans.  They assume: (a) That they'll still be doing
well financially 30 years down the road; (b) That they can pick good
investments so that the pension funds WILL cover the expenses.

Would it be a big surprise if the conservative accounting requirements
(I refer to NOT to the political party, but to the sense of the word
"conservative" as is used in accounting) encouraged a company to
OVERINVEST in the pension fund?  In order that they be REALLY sure
that there's enough money in there to cover the pensions, they put in
more than the minimum.  This has several benefits:

1) Investors get really scared if the pension funding is "close".
They're happier if there's a surplus.

2) Bankers are similarly happier to see a surplus

3) Employees are happier to see a surplus

4) Taxes might get deferred  (No, I wasn't supposed to mention that!)

5) Supposing there's a bad year next year, and they can't contribute
fully.  A surplus this year means they can more easily survive a
"rainy day."

6) The accounting methods for pension plans REALLY try to be
conservative.  In order that the auditor doesn't say everything's ok
when the company is ready to fall apart, there is a tendancy to assume
the worst (don't report a sale until it's CERTAIN; report an expense
as soon as it becomes POSSIBLE).  In order to get a positive looking
report, the fund needs to be doing WELL.  Which means that the company
might want to make sure it's "overfunded."

These are all reasons why the company might invest more money in the
pension fund than was absolutely necessary.  And it means that more
often than not, pension funds WILL run surpluses in the long run.

This isn't as a result of anything that the employees have done/earned
- it's because the company did a good job of managing the fund.

If the employees haven't done anything to actually EARN these
surpluses, and the company HAS done things that would result in such
surpluses, it is REALLY hard to argue that this is "pilfering and
destroying pension funds", as you have described it.
-- 
Christopher Browne
cbbrowne@csi.uottawa.ca
University of Ottawa
Master of System Science Program
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