June 12, 2003 Thursday Ontario Edition
Fairy godmother bails staff out of pension pickle
BYLINE: James Daw Money Talk
SECTION: BUSINESS; Pg. D02
LENGTH: 794 words
TransCanada PipeLines Ltd. of Calgary experimented with a choice of pension plans in the late 1990s.It didn't go well. Half of employees were fine. They stayed with the traditional defined benefit plan to get a pension based on their years of service and final average pay. The rest jumped at the chance to play the securities markets with money that they and the company rolled into a defined contribution plan. Unfortunately, they made poor investment choices, then watched a large share of their money evaporate during a three-year collapse in equity markets.
TransCanada, which runs about $20 billion in gas pipelines and power plants, had made things as easy as possible for the amateur investors. It matched employees' contributions up to 6 per cent of pay, lined up a selection of professionally managed investment funds and paid all the cost of management and record-keeping. Yet, by selecting the wrong mix of funds at the wrong time, these employees earned an average of 3 percentage points less per year than the pension plan manager, in good markets and bad. If they had kept that up, their retirement income could have been less than half that of the fuddy-duddy pensioners.
A survey last year revealed that, despite the investment education provided by the company, 36 per cent of employees still did not have the necessary general knowledge. So, in an unusual blend of Big Brother and fairy godmother, TransCanada moved to bail everyone out. It brought them all back into the defined benefit plan effective Jan. 1. The company granted retroactive service credits, promised to make up any shortfall in funds and let the minority of successful investors keep any extra funds. Notes to the company's annual report indicate it will have to contribute $44 million to cover past service costs. This money could not be found in the pension fund. It was short $220 million - nearly $92,000 per employee - compared with $841 million in obligations at year-end. TransCanada, now a unit of TransCanada Corp., is in better shape to make up that shortfall over five years than many companies. It earned $747 million in profit last year and still has strong credit ratings.
David Mackay, TransCanada's manager of pensions and benefits, told the Canadian Pension & Benefits Institute last week that some employees objected to losing the defined contribution plan. They tended to be younger workers who do not plan to make a career with the company, and the few successful investors. Their concerns were addressed in part by a guarantee they will receive no less a termination benefit if they quit than they would have received last year. Employees also have the option to make extra contributions to buy increased inflation protection or early retirement benefits. Suspicions were further allayed when employees learned that it was going to cost the company money to bring people back into the plan, Mackay said. "Older employees were very, very happy, especially those who moved from the defined benefit to the defined contribution plan in 2000 (just as market started to fall)," he added. Employees who never left the defined benefit plan objected. They did not think their colleagues should be bailed out for making a bad choice. But Mackay said TransCanada would have made the same decision to bring everyone into the defined benefit plan if stock markets had not fallen. "We had a business need to move them into this plan," he said.
TransCanada decided it needed to work harder to keep employees. It had left employees behind when it moved from Toronto to Calgary about 13 years ago. Jobs disappeared when it merged with Nova Corp. in 1998. It decided that it had reinforced the culture of transience and a lack of loyalty when it introduced the defined contribution plan. What it now wants to do is tie its highly skilled employees to their jobs and remove any distractions or concerns related to retirement income. "We want them to focus on the job at hand and know that in the future they will have a pension," Mackay said.
William Moore of benefits consultants Towers Perrin advised TransCanada on its changes in and out of defined contribution plans. He said enthusiasm for defined contribution plans has definitely waned since the roaring 1990s, and some employees may yet sue their companies over such plans. So far, though, only a handful of companies are assuming the risk and expense of switching back to defined benefit. TransCanada's employees should count their blessings.
James Daw, CFP, appears Tuesday, Thursday and Saturday. He can be reached at Business, 1 Yonge St., Toronto M5E 1E6; at 416-945-8633; 416-865-3630 by fax; or at email@example.com.