The RSMC showdown at Canada Post

Rural Suburban Mail Carriers, equality with Urban workers, and the Universal Service Obligation.

RSMCs have always got the leftovers when it comes to wages and benefits compared to their urban counterparts. The Canadian Union of Postal Workers want to change this legacy while Canada Post states the timing of such a financial demand couldn’t be worse.

RSMC equality has an estimated annual $147 million price tag.[1] CUPW asserts there is no alternative but to do the right thing. Canada Post has no money in their coffers to right this wrong. Where do these two parties go from here?

RSMCs are Canada Post delivery agents who deliver to all rural and many suburban areas of Canada. They are classified and paid differently than their urban counterparts.

They are a money-losing proposition from a financial perspective because they deliver to largely non-profitable geographic areas in Canada. Their services are a legislated money-losing part of the business ordered by the Government through legislation called the Universal Service Obligation.

Urban delivery areas are money makers and are intended to make up for the shortfall for suburban, rural or isolated delivery areas. Canada Post is forced to subsidize delivery to these non-profitable regions through the Universal Service Obligation to an approximate amount of $375 million dollars per year.[2] Therefore Canada Post is loath to not only spend extra money they don’t have but also in a realm of their delivery model where they lose money.

There is also now a second factor that has come into play — Canada Post can no longer cover the USO through profits in its urban centres. Urban centres do not generate the extra cash flow to cover this cost anymore.

If the Government revised the USO, it would take a big load off of Canada Post’s financial problems — a move that not only would generate cash to fund RSMC equality, but help Canada Post’s bottom line as well.

Canadasmodernpost.wordpress.com has been tracing the financial state and business decisions of Canada Post since February 10, 2011. The results, especially after the 2008 recession have not been good. If it was not for Government intervention in allowing Canada Post to sell bonds and allowing increased credit limits, Canada Post would have either gone into bankruptcy or all of its assets divided and sold.[3] It would be unlikely the Government would have put in billions of taxpayer monies to keep it afloat.

This has gone unnoticed by most readers or employees of the corporation. Even today the company is on life support.

All these assertions will not be substantiated here. This is thoroughly documented throughout canadasmodernpost.wordpress.com. The narratives given from this website is from researching and documenting the facts.

CUPW has put in a demand that 8,000 or so RSMC members become full-time equivalent paid employees as their urban counterparts.[4] RSMCs do the same job as their urban delivery counterparts, except the locale is different. Often RSMC agents work beside their Urban counterparts. The workstation is the same and the physical mixture of parcels and mail is indistinguishable. You visually wouldn’t know who is Urban or RSMC when walking past their workstations.

The only difference is the wage and benefit gap between RSMC and Urban workers — the Urban employee makes substantially more doing the same thing. RSMCs get paid on average $37,205 while Urban employees earn $52,551 per year.[5] CUPW believes now is the time to make things right.

Urban members get paid overtime while RSMCs do not. Urban members contribute more towards the pension plan because of their higher wage and will have a better pension stipend than the RSMC counterpart upon retirement. An RSMC is not eligible for post-retirement health benefits either as Urban pensioners do.

The equality of the RSMC members is a fundamental stance of the Canadian Union of Postal Workers for a new Collective Agreement. Equality also means the right for RSMCs to operate company-owned vehicles instead of them being subsidized to operate their own private vehicles. RSMCs are remunerated a small sum for this purpose, but many insist that it doesn’t cover their costs.

Equality is a just and moral thing to do in this case, but other questions still linger. If Canada Post is currently financially unstable and has an annual payment of +$1 billion to the pension fund starting in 2018, how are they going to afford to promise additional funding to right this wrong? The math doesn’t add up.

Canada Post cannot accept this demand because of cash-flow problems. It would be futile to strike over this because the Corporation cannot capitulate on such a large demand for survival reasons.

There are three solutions out of this deadlock:

  • The best choice is the Government to revising Canada Post’s Universal Service Obligation loss structure. Canada Post can no longer cover the $375 million in expenses to the Universal Service Obligation through its urban operations. There is nothing that the corporation can do to change this policy either. It is an act of legislation. The Government must address this funding formula and in doing so, compensate Canada Post for this mandated loss. The monies the corporation could recover through this revision would result in RSMC equality.

  • If this cannot be obtained then these are the inferior choices:

    • RSMCs acquire full pay scale and vehicles after 2018. By this time Canada Post should have its financial affairs in order and should be able to absorb the $147 million annual or upwards in cost.

    • Urban workers of Canada Post workers take an immediate wage cut or a combination of wage and benefits amounting to 6.6 % to cover the costs of equalizing the RSMC into the same pay structure/benefits and have a company owned vehicle.

—-

Footnotes

  • [1] Here is the calculation: Annual difference in wage formula: $52,551-$37,205=($15,346) x 8000 RSMCs=($122,768,000). This does not include extra monies generated from Urban generated overtime, flyers or the expenses incurred by Canada Post by offering better benefits to Urban employees. I have seen the number of RSMCs employed by Canada Post higher, over 8,400 but can’t verify the number. 8,000 is a conservative estimate.
    Vehicle costs: 8000 x $250.00=$2 million per month. $24 million per year. This is based on a low-lease rate of $250.00 per month. Not including gas, or maintenance.
    $122,768,000+$24,000,000=$146,768,000.
    This is a ball park figure based on non-substantiated data, so a conservative calculation was made. If real data was provided, I suspect that the real cost would be substantially higher.
  • [2] See Canada Post and the Universal Service Obligation for more info.
  • [3] See A Brief History of Canada’s Postal Transformation for more info.
  • [4] See CUPW Perspective Newsletter Pg. 3 for CUPWs position on RSMC equality.
  • [5] Wages as found at https://www.glassdoor.ca/Salary/Canada-Post-Salaries-E8747.htm. The sampling of this wage found on this website is not very large but after reviewing the salary rates on of RSMC job postings on Canada Post’s job website, this seems accurate.
Posted in Financial | Tagged , , , , , , , , , , ,

The Canada Post Pension Plan: the Elephant in the Room

A report on Canada Post’s Defined Benefits pension plan and how it has become the number one issue to the company’s future survival. A look into the problems, challenges and solutions within the most difficult times in the history of Canada Post.

Table of Contents

  • An outline of the pension dilemma
  • The historical health of the Defined Benefit plan until 2007
  • The 2008 recession and the Canada Post Defined Benefits pension plan (DBP)
  • Is pension mismanagement a cause of this crisis?
  • How Canada Post survived the economic realities
  • Second and third problems with the Canada Post Defined Benefit plan
  • Solutions to the Canada Post Pension Plan crisis
    • Request for the abandonment of the solvency valuation
    • The introduction of the Defined Contribution Plan (DCP)
    • Converting to a Target Benefit Plan (TBP)
    • Selling off assets or privatization
  • Canada Post’s plan to make the annual +$1 billion payment starting in 2018
  • What does this all mean?
  • The X factor

An outline of the pension dilemma

Canada Post is in a pension crisis. The problem is so severe that it has put the company in negative equity – a position which means that if Canada Post group of companies were to close its doors today and sell all its assets it would still owe an additional $1.1 billion dollars.

This predicament is not with the everyday operations of the plan, rather it has to do with a calculation and provisions called a solvency valuation. This is a mathematical equation that formulates how much money is required in the fund if the sponsor of the Defined Benefit plan ceases existence. If there is a calculated deficit, the sponsor must contribute monies over a five-year period to meet any underfunding. In the normal working operations of a corporation with a DBP, solvency deficits do occur and they are topped up. Other times they have a surplus. This is part of the regular life of a DBP. The solvency valuation requirement was designed to protect employees in case a company folded for whatever reason. The employees pension would be guaranteed to perpetuate.

In Canada Post’s situation, the $6 billion+ or so[1] amount owing to the pension is so big that the corporation is supposed to contribute around $1.4 billion dollars in 2015 alone – money they admittedly don’t have.[2] They have been granted temporary relief from regular payments towards the solvency deficit while they look for options to alleviate or remove this requirement.

The 2015 Annual Report clearly substantiates this tension:

“The solvency deficit to be funded for the Canada Post Corporation Registered Pension Plan is estimated at $6.2 billion (using the three-year average solvency ratio basis) as at December 31, 2015. Significant obligation of the RPP and other post-employment benefits continued to be a concern for the Corporation. The large size and volatility of these obligations compared to our cash position and profit put substantial pressure on cash flows and our ability to fund need investments in modernization and growth. Volatility from one year to the next is caused by fluctuations in discount rates, investment returns and other actuarial assumptions, resulting in sizeable financial and long-term liquidity risks to the Corporation. During 2015, this volatility had a positive effect on the Group of Companies’ defined benefit plans, leading to remeasurement gains of $794 million, net of tax, recorded in other comprehensive income (loss) and improving the Group of Companies’ equity balance to negative $1.1 billion as at December 31, 2015. However, without pension funding relief permitted by legislation, Canada Post would have been required to make special contributions to the RPP of approximately $1.4 billion in 2015.”[3]

The historical health of the Defined Benefit plan until 2007

The Canada Post Pension plan is not very old at all. It was created on October 1, 2000, after the Federal Government decided to separate it from the much larger Federally sponsored Superannuation Plan.[4]

The Government was very cautious with the legislation and enshrined embedded terms into the Pension Plan that protected it from Canada Post or the Union altering the terms. Concerned pensioners on the Canada Post Pension plan reiterated this guarantee in their 2014 submission about the potential conversion of their coverage to a target benefit plan.

The “benefits accrued to or acquired by members as of October 1st, 2000 cannot be the subject of collective bargaining as stated specifically in subsection 46.3(7) of the Canada Post Crown Corporation Act: (7) The provisions of the pension plans referred to in this section respecting benefits that had accrued to a member under this Act before the effective date of the plans shall not be subject of collective bargaining (…) and shall not be altered in a way that would reduce those benefits.”[5]

Even with $28 billion being taken out of Federal pension plan in 1999 by the then Liberal Government for paying down the national debt and later dividing Canada Post into a separate pension plan in 2000, solvency valuation was not a threat to the company’s economic condition. In fact, the Canada Post pension was doing so well that the Corporation took a pension holiday starting in 2007 and 2008 with anticipation that the holiday would last for a number years. There was optimism that the money normally reserved for pension would be diverted as part of the stimulus for the postal transformation. $585 million was never injected into the pension as it normally should have during this period, nor were there any special payments.

The 2009 Canada Post Pension Plan Annual Report succinctly stated this:

“As the Plan’s December 31, 2007 actuarial valuation disclosed a solvency surplus of $449 million, the Corporation ceased making current service contributions to the Plan recovering $373 million ($212 million recovered in 2008) worth of special payments previously made to the Plan. Due to the economic decline in late 2008, the Corporation resumed making current service contributions to the Plan.” [6]

Sean Silcoff of the Financial Post warned in 2008 about the postal transformation that a cash reserve should be created in case the financial markets changed:

“But volatile markets mean Ms. Greene may need to conserve cash in case there is a shortfall in the post office’s pension plan. Ms. Greene inherited a $1.4-billion plan deficit when she joined in 2005. That was gradually whittled down by rising markets and $719-million in special contributions.”[7]

The 2008 recession and the Canada Post Defined Benefits pension plan (DBP)

The timing of this risk couldn’t have been worse and indeed a shortfall did happen which the Post Office was unprepared for. The pension contribution cycle had to be restarted after the 2008 market crash — much earlier than planned. However, the future money allocations had already been committed to postal transformation.[8]

The Canada Post pension plan was one of many pension plans across the world that was severely impacted by the subprime mortgage crisis in the United States and the recession that followed afterwards. The low-interest rates we now experience are the continued aftershock of the crisis. Low-interest rates have never been historically continued for this long. Any Pension plan, regardless of its structure, is not designed to effectively operate in such an environment. It is not known how much Canada Post was directly impacted but it must have been significant. The much larger Ontario Teacher’s Pension plan lost $8.8 billion in assets during the 2008 meltdown.[9]

The increased focus on the Canada Post Pension Plan can be traced in the Canada Post annual reports. In 2004, the word pension is only mentioned 68 times. By 2009, it is mentioned 189 times and is a pertinent part of the chairman’s and president’s messages in several annual reports.

Canada Post had already been able to overcome a $1.4 billion deficit in the pension in the early 2000s, but the second deficit had much greater hurdles than the first one. By 2008, Canada Post was in the midst of over $2 billion in upgrades. It was intended to be self-funded through the pension holiday, attrition of 7,000 jobs, revenue generation, and workflow improvements. However, the recession caused a serious decline in revenue, the pension holiday had to be cancelled, and the modernization was slowed, which in turn did not allow for the anticipated attrition rate. The planned improved efficiencies did not affect the bottom line as predicted. The average annual cost of delivery to a home went up from $261 in 2010 to $286 in 2015 while CMBs remained steady around $123.[10] The modernization did not achieve the purposed financial objectives.

Is pension mismanagement a cause of this crisis?

Not all pension plans have the same problem as Canada Post. The Ontario Teacher’s Pension Plan has a solvency surplus of $13.2 billion[11] while Canada Post’s Pension Plan has a negative $6.1 or so billion – a number that frequently changes depending on financial variables. Why the OTPP has succeeded through these perilous financial times and CPPP did not, is not known. However, the OTPP demonstrates that a properly organized and managed plan can succeed.

How Canada Post survived the economic realities

The modernization plan developed around 2006 had spiralled out of control. By 2008 over $2 billion in debt along with a quickly rising pension solvency problem initially put the company well over the $4 billion mark in monies owing. This is not good news for a company that generates around $6.3 billion every year.[12]

Canada Post was forced to increase their credit limit with the Government and issue special bonds to the public in order to continue the postal transformation and meet its daily commitments.

Another action was temporarily selected for the Canada Post Pension Plan – deficit solvency relief. This was offered to all Government-sponsored Pension plans struggling during this period. Canada Post took advantage of that measure in 2011.

This allowed Canada Post to make special payments of only:

  • $219 million in 2011
  • $63 million in 2012
  • $28 million in 2013
  • $41 million in 2014, and
  • $34 million in 2015.[13]

Mary Bishop, an Elected Retiree Representative on the Canada Post Pension Plan Advisory Committee, emailed the Department of Finance Government of Canada, June 18, 2014. She touched on the situation related to the deficit solvency strategy while addressing another issue confronting the pension plan:

“Federal pension legislation provides solvency funding relief for DB pension plans. From fiscal 2011 to fiscal 2013, the total amount of solvency relief received by Canada Post under federal legislation was $2,390 million. Under the existing legislation Canada Post was expected to reach the maximum relief available ($2,889 million) in fiscal 2014. Without any solvency funding relief in 2014, Canada Post’s required solvency funding payments were estimated to be $1.3 billion. In February 2014, the Government of Canada approved the Canada Post Corporation Pension Plan Funding Regulations. These regulations exempt Canada Post from making special payments into the DB pension plan for four years (from 2014 to 2017). Although the amount of solvency payments that will be foregone from 2014 to 2017 cannot be quantified, the funding relief already provided to Canada Post would have resulted in a significant return to the pension plan, given the pension plan’s annual returns from 2011 to 2013 (0.2% in 2011, 10.1% in 2012 and 16.9% in 2013)6 , if these funds had been available for investment.”[14]

The solvency deficit relief mechanism was in place until 2014 when new legislation was introduced that granted Canada Post further relief until 2018. As found in the 2015 Canada Post Annual Report:

“We also continue to benefit from relief provided by the Government of Canada since February 2014, which excludes us from making special payments to the Canada Post Corporation Registered Pension Plan (RPP) from 2014 to 2017, and gives us time to address the RPP’s sustainability. During the relief period, we are working with our unions and other representatives of RPP members to evaluate all options, including plan design changes, to make the RPP financially sustainable. We expect to resume special payments in 2018, at the end of the temporary relief period.”[15]

Even with such a mechanism in place, Canada Post has only been able to generate modest yearly profits between $60 to $200 million a year during this period. If the solvency payments were required, Canada Post would have lost over $1 billion annually. Given its current economic state due to the modernization program, decline in lettermail, and limited availability to credit, this would have forced Government intervention or bankruptcy.

Canada Post realizes that by implementing this deficit solvency strategy, it could create its own set of problems. This is acknowledged within Canada Post’s own documentation:

“This relief could have the effect of making the deficit worse. In the unlikely event that the Plan was terminated while it is in a deficit position, pension benefits could be lower than if additional funding was put into the Plan.”[16]

Second and third problems with the Canada Post Defined Benefit plan

Canada Post’s modernization of the workforce means that there will be fewer people paying into the pension plan. This reduced workforce will not be able to sustain the plan. Garth Turner, twice elected member of the House of Commons, once the minister of National Revenue, and now a business journalist among many other endeavours, states that the money coming into the pension is smaller than what is going out, “Last year the plan shelled out $880 million. It took in $513 million. Try doing that with your chequing account.” [17] His numbers do come close to Canada Post’s disclosure in their Canada Post Pension Plan Report to Members 2015. This is a very discouraging statistic on the future health of the plan.

The third problems is related to mortality. The plan was not designed to monthly support a greater number of people living 20 to 30 years into retirement. This was not foreseen in the earlier development of defined benefit plans.

Solutions to the Canada Post Pension Plan crisis

Request for the abandonment of the solvency valuation

In 2008, Moya Greene, the then president of Canada Post, quickly identified the root problem of the pension crisis – the pension solvency calculation itself. Her initial reaction was for its removal entirely from the pension plan.

“As with Crown corporations in provincial jurisdictions, Canada Post should be either exempted from funding solvency deficits or the government should agree to guarantee payment for any such deficit, in the unlikely event that the company was wound up and a solvency deficit materialized.”[18]

. . .“But the rule relating to the solvency calculation poses a problem for Canada Post as it creates a significant and unpredictable drain, diverting cash that could be used for operating requirements and investment priorities. The solvency-basis valuation considers whether Canada Post would have enough money to purchase annuities to cover its existing pension liabilities should it be wound up. Since Canada Post cannot be wound up without an Act of Parliament, the likelihood of this occuring is remote. The pension solvency calculation is therefore theoretical, arguably not necessary, and potentially harmful to the Corporation’s ability to manage its cash.”[19]

This is one of the few areas that both Canada Post management and the Canadian Union of Postal Workers (CUPW) unequivocally have agreed upon. CUPW has since released a statement about this very thing in a discussion on target benefit plans in 2014.

“CUPW is also of the view that crown corporations and other government entities should not be subject of solvency funding obligations. Canada Post is an “agent” crown corporation. As CUPW is often reminded, the Government of Canada is Canada Post’s Page 6 of 28 only shareholder. Given the creditworthiness of the Government of Canada, a solvency funding obligation is unnecessary for Canada Post.”[20]

The Government response to such a request must have been negative because Canada Post has since abandoned this assertion on the solvency issue. The Canada Post pension website has a question/answer page. The release from solvency valuation was one them.

Why isn’t Canada Post excluded from solvency requirements? Why doesn’t the Government simply grant permanent relief?

The Government expects Canada Post to operate on a financially self-sustaining basis including the funding of its Plan, in accordance with current solvency requirements under the Pension Benefits Standards Act, 1985.”[21]

This answer demonstrates the corporation no longer pursues the end of solvency valuation as a solution to their crisis.

Benefits Canada a publication devoted to issues around benefits and pensions in Canada also questions the solvency issue.

“But what was seen as an industry revolution in 1987 has since become outdated and ineffective. Falling interest rates have driven solvency liabilities eight or nine times higher than they were in the late ’80s, making contribution levels unsustainable for organizations sponsoring DB plans. Even worse, the solvency rules currently in place haven’t met their main objective: protecting members’ pensions in cases when DB plans were wound up due to bankruptcy.

The long-term prognosis for DB pension plans—and the members counting on them for their retirement— isn’t good unless something is done soon to fix the solvency regime.”[22]

The article further adds that other sectors have already made adjustments, so Government regulators should follow the lead with public sector pensions.

“In the years since Canada’s solvency funding regime first took shape, other financial sectors have updated their solvency rules to adapt to the changing times. The banking solvency regime has made significant changes in response to economic factors and sophistication in modelling methods, including Basel I (1988), Basel II (2004) and Basel III (2013). The insurance industry has also revisited its rules several times to better reflect the changing economic and business environment and to protect against risks.”[23]

Benefits Canada is not disputing the nature or purpose of a defined benefit plan or abandonment for a modern alternative. The article suggests it simply needs tweaking in the solvency formula.

In some jurisdictions the solvency valuation has been removed. The large Health Care of Ontario Pension plan is one of them. The Ontario Government withdrew this requirement because it is a combination of being jointly sponsored and a public service plan.[24] Since there are so many sponsors and no one single corporation contributing to the plan, the chances of the plan winding-up are remote. The same situation applies to the Healthcare Employees Benefit plans (HEB) in Manitoba.[25] Canada Post being the sole sponsor does not qualify for this method of exemption.

The introduction of the Defined Contribution Plan (DCP)

Canada Post has created an alternative pension fund that is limited to new employees and management officials.[26] It is called the Defined Contribution plan. These new hires are not eligible for the Defined Benefit plan. As of December 31, 2015, there are only 1,097 active members compared to 53,238 active members in the Defined Benefit plan.[27]

What is the Defined Contribution plan?

Rob Brown, a former professor at the University of Waterloo and past President of the Canadian Institute of Actuaries, analyzed this model and published the results in the book Canadian Health Policy in the News: Why Evidence Matters. He wrote:

“. . . in a Defined Contribution Benefit plan, it is the contribution that is defined with no commitment to how much will be paid out in retirement. For example, the plan may provide that the employer will contribute $1 to the pension plan per hour of work. Or it could state that the employer will contribute five per cent of an individual’s pay into the plan. However, once the employer makes the contribution that is the end of the employer’s responsibility. If the stock market crashes or interest rates on investments are low, the worker will have a lower asset pool at retirement and, thus, lower income post retirement. Thus, the worker has no idea until very close to retirement what income to expect and how much more to save on their own. Just imagine the difference between retiring in 2007 versus 2009.

It is further true that even if investments work out as hoped for, the new Defined Contribution pension plans being offered by Air Canada and Canada Post should not be expected to result in benefits as large as the Defined Benefit plans they want to close. For the level of benefits now promised to Air Canada and Canada Post workers, employer contributions in excess of 10 per cent of pay would be expected in today’s climate. One would not anticipate the new Defined Contribution plans being that rich.”[28]

Mr. Brown, jointly with Craig McInnes, further adds to this discussion with an article written for the Financial Post titled, Why shifting from defined benefit to defined contribution pension plans won’t work. They describe that “DC pension plans are inefficient generators of pension income.” They further strengthen this point by adding:

“Several U.S. states that have looked at converting DB plans to DC have concluded that it would cost considerably more to maintain similar benefits. Two states that had converted to DC at least partially converted back because of concerns over how little income they were producing for retirees. A DC plan can be designed that will be better than most of those existing in Canada today, but experience and modeling show that it will still be a more expensive way of producing retirement income than a large, well-run DB plan.”[29]

Canada Post’s Defined Contribution plan is a pooled one. Although Canada Post is the sponsor and administrator, Sun Life Financial is the service provider.[30]

In the early 2016 stages of a new contract with the Canadian Union of Postal Workers, Canada Post proposed that the Defined Benefit plan be frozen. After a certain date, all further contributions were to be designated to the Defined Contribution plan. This proposal was withdrawn as of June 26, 2016.[31]

Converting to a Target Benefit Plan (TBP)

The Canadian Government is searching for an alternative to the Defined Benefit Plan for all of its sponsored pension plans and their preferred option is a Target Benefit Plan (TBP).

What is a Target Benefit Plan?

A Target Benefit plan is theoretically a middle ground between a Defined Contribution and a Defined Benefit plan. In the case of the DBP, the sponsor is financially responsible to guarantee a fixed income for retirees while they have no responsibility for any outcome with a Defined Contribution. Whatever are the results from the market investments is what the contributor gets. Unike the DCP, the TBP sets financial targets with a variable contribution method. If the targets are met, then the employer/employee contribution rate remains the same and retirees get the expected benefit. If the target is exceeded, then contributions decline, and retirees get the same expected benefit. If the target is not met, then the employer and employee dually increase contributions, and the retiree’s benefit will be adjusted lower until the target is met. This method allows for a rough idea of what a retiree can expect to receive with some variable risk whereas, a Defined Contribution cannot.[32] TBP’s do not require a solvency valuation.

The present Minister of Finance, Bill Morneau, who previously “was executive chair of Canada’s largest human resources firm, Morneau Shepell, and the former chair of the C. D. Howe Institute”[33] may greatly influence the outcome of this discussion and potential conversion to Target Benefit plans throughout the public service. Morneau Shepell is “the largest administrator of retirement and benefits plans and the largest provider of integrated absence management solutions in Canada.”[34] It also is one of the biggest proponents for the Target Benefits plan.

Canada Post began an investigation into converting the Canada Post Pension Plan into a Target Benefit plan. Although this is against the legal constructs and intention of the original formation of the Canada Post Defined Benefits plan as noted above, it is under investigation as an alternative. It would eradicate the solvency issue completely, but also change other parameters of the pension plan. There would be fewer guarantees on a financial outcome.

On April 24, 2014, the then Conservative Government began consultations on the adoption of Target Benefit plans for “federally regulated private sector and Crown corporation plan sponsors.”[35] The Crown corporation category included Canada Post. After the loss of the Conservative Government to the Liberals in 2015, there was a general feeling that this framework was abandoned. However, the Department of Finance issued an email in March 2016, stating that this still remains a priority for the Government.[36]

In a 2014 submission by Canada Post to the Department of Finance on Target Benefit Plans there is an assumption that this process has already begun within Canada Post’s framework. The paper notes that the solvency issue be removed from the TBP.

“The solvency calculation, while useful in some past circumstances, has generated negative impacts which outweigh any usefulness. This method is not recommended for federally regulated TBPs based on these plans’ structure (i.e. benefits are not promised through a guaranteed lifetime annuity).”[37]

Canada Post also brought into the discussion how the legislation ought to be formed and the legalities surrounding objection. The idea of objection is one that is the forefront of the discussion. If those recipients of a Defined Benefit plan object to the transfer, what is the threshold of consent that would allow for the transfer to happen? The Government has not ruled on this yet.[38]

The introduction of a Target Benefit plan as a replacement of the Defined Benefit plan would have to be changed through legislation.

Canada Post’s plan to make the annual +$1 billion payment starting in 2018

How Canada Post expects to make these annual contributions is not known. This is a large cash outlay. Conversions to CMB, anticipated employee attrition, increases in parcel delivery services, proposed rollbacks to employee benefits, and conversion from a Defined Benefit plan to a proposed Target Benefit plan do not add up to this figure. Canada Post would still need to pay the solvency valuation before converting the plan.

This does not include the much needed infrastructure costs to upgrade Canada Post’s modernization program – a blueprint not fully implemented due to lack of funds. Canada Post needs to find an extra $1.7 to 1.9 billion annually in cost savings/extra revenue to achieve its objectives.

Canada Post expects to save $450 million annually through increase pricing, reduced labour costs, reduced benefits, streamlining, expanding postal franchises, and CMBs. It could be higher if the Federal Government allows for the continuation of CMB conversion. Even with this allowed, it still does not meet the targets required.[39]

Selling off assets or privatization

These are solutions suggested by Michael Warren, the first CEO of Canada Post after it was turned into a Crown corporation in 1981 and remained there until 1985. He has continued a strong resume in finance and business since then. In an article written for the Toronto Star titled, “Ending Canada Post’s death march,” he gave the following solution to the pension deficit:

“…Canada Post owns 90 per cent of the parcel company Purolator. It is run separately from Canada Post and has been profitable for years. It should sell for somewhere between $1.5 billion and $2 billion. The proceeds should go toward paying down the corporation’s mounting pension deficit.”[40]

He further adds in this same article “Canada Post should be privatized and the proceeds go to paying off as much of its debt and pension shortfall as possible.”[41] He believes that Canada Post’s current business model is not sustainable and will require massive subsidies. The only remaining alternative is privatization and the proceeds from the sale of Canada Post should pay down the previous debts and pension shortfalls.

What does this all mean?

The solvency issue gives Canada Post a way change the whole Defined Benefit plan that best suits the needs of the corporation at the cost of individual security. Instead of addressing the solvency issue, which is the core of the problem, they suggest abandoning the framework altogether. Yes, the plan needs upgrades, but not abandonment.

The current framework that Canada Post has introduced is a hybrid and it does not address the present Defined Benefit solvency valuation issue. Whether it changes to a Target Benefit plan through legislation, Canada Post is still in a crisis situation. It still owes +$1 billion in 2018 – money they don’t have.

The X factor

There is something missing in Canada Post’s blueprint. The financials, annual reports, negotiations for a new contract with its largest union, and public discussions lack any indication where $1 billion+ is going to come from when the total is due starting 2018 and onwards. Whether the Government has already planned legislation to convert all Federal plans into a Target Benefit or less likely a Defined Contribution plan before 2018 and erase this solvency valuation altogether or is going to grant Canada Post further relief after 2018 are two distinct possibilities. All correspondence from the Government so far indicates that removing the solvency formula from Canada Post’s DB plan is not an option. Full or partial privatization has not been found in any discussions within any Canada Post or Government documentation so far.

Canada Post cannot be privatized without this issue being addressed. If the Government would sell this Crown Corporation today or wound up the company, they would have to take a significant loss. Once this pension crisis is addressed, it gives far more leverage to the Government and Canada Post to chart the Corporation’s future.

—–

Footnotes

Posted in Pension | Tagged , , , , , , , , , , , , , , , ,

A Comparison of Canada Post’s Pension Plan

An article by Jennifer Paterson titled, “How Air Canada’s pension took off as Canada Post’s plan sank into deficit.” As found in Benefits Canada — a publication that “is the country’s most influential pension and benefits publication for decision-makers in Canadian workplaces.”

An interesting and informative read.

http://bit.ly/1sri5cV

Posted in Financial | Tagged , ,

Dr. Ian Lee on the near future of Canada Post

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How will Canada Post survive the post-letter era? Dr. Ian Lee took a deep look at the challenges and offers solutions.

Ian Lee is Associate Professor at Carleton University’s Sprott School of Business. He published a critique on the future of the Canada Post Corporation entitled, Is the Cheque Still in the Mail? The Internet, E-Commerce, and the future of Canada Post Corporation.

It is a must-read for anyone interested in the business of Canada Post. Canada Post is a Crown corporation under the auspices of the Canadian Government. Because it is a Government entity and has no accountability to shareholders, this corporation has been severely understudied about its business decisions over the last decade.

Dr. Lee is one of the few who has taken considerable time and energy parsing through Canada Post’s financial statements and giving a thorough critique.

His background, education and experience give significant credence to his conclusions. Early on his career, he worked at Canada Post’s head office, corporate finance and banking, from 1982 to 1984. His PhD thesis was on the origins, growth and decline of the Canada Post.[1]

The article published by Dr. Lee along with his interview by Geoff Currier on a Winnipeg radio station, CJOB, outlines a position that Canada Post is dying and needs to be resurrected as a parcel delivery service. He clearly demonstrates the demise of the traditional Post Office and how some necessary adjustments must be made for its immediate survival, but he doesn’t delve any further into the long-term.

I predict within ten years by 2025 there will be no letters mailed in Canada. They will be as obsolete as 78 playing records or 33 and a third, or 8 track cassettes, or disco music.[2]

He highlighted nine recommendations that change the nature and definition of Canada Post.

  • Not to privatize Canada Post
  • Eliminate the Postal Monopoly or exclusive privilege to deliver letters
  • Replace all door-to-door mail delivery with community mailboxes
  • Reduce daily delivery to residential (not business) customers
  • Franchise all corporately-owned Post Offices
  • Consolidate Processing facilities
  • Implement the Canada rural broadband strategy by 2020
  • Deregulate CPC post pricing of letter mail
  • Revise the Canadian Postal Service Charter and the Universal Service Obligation[3]

When it comes to statistics and financial analysis, he carefully substantiates every point. He sets a new standard in the Canada Post debate.

Dr. Lee ordered “Not to privatize Canada Post” first because he wanted to be emphatic about this point. However, this is confusing. He believes his recommendations will lead to reforms in the letter mail service that will allow for privatization of the parcel service. Is he promoting Canada Post being a Crown corporation for the now, and then when Canada Post successfully transforms to a parcel delivery company then privatize? This point needs further clarification.

Neither does he answer the question on the survival rate of going private. Canada Post has a meagre infrastructure and does not have the capital to compete with the likes of UPS. Nor does he refer to the current talks between Canada and other countries discussing the Trans Pacific Partnership deal — an agreement which would require Canada Post to privatize.

He also omitted a serious failure by Canada Post’s management team that cost the company billions of dollars. Canada Post embarked on the transformation in 2008 with the idea of it being entirely self-funded without any debt. However, they were not prepared for the recession and this put them into a serious financial hole — one that they never have recovered from. If Canada Post was a publicly traded company at that time, they would have been close to if not in bankruptcy. Shareholders would have ousted the chairman, board and president. Instead, the blame has shifted to labour costs being too high. In other words, there is no admission to mismanagement. The problem has successfully been placed on employees instead.[4]

As a specialist in the financial sector, he believes that postal banking is not an option for Canada Post. The complexity of banking has increased significantly over the years and Canada Post does not have the ability to cross-over into this realm. Nor do present employees have the necessary transferable skills. The CUPW plan would also be cost-prohibitive:

I will be very blunt with you, I think it is preposterous. Before I worked at Canada Post and I went back to school for my PhD I worked ten years at banking, Bank of Montreal, I was in management lending money. Anybody who knows anything about banking knows that in the last 15, 20, 25 years banking has become very sophisticated. You have to be quite educated to get into a bank. My students are going in there now. You know Bcomms and finance and that sort of thing. More importantly banking is very capital intensive. The CBA, the Canadian Bankers Association, reports that the banks in Canada spends 2 billion a year, to upgrade their hardware, their software, their programmers to guard against fraud and people trying to hack in, and of course the high-speed digital communications. The idea that CUPW, and I am not putting them down, they are good people, but the idea that they could become bankers and that the Government going to spend billions of dollars to wire up all the branches across Canada of the Post Office to turn it into a bank. And the one final point on why it is such a silly idea, banks, deposit to a bank are a cost. You have to pay the depositors money. You have to pay them interest on their accounts and then you the bank, turn-around and make money by lending it out on mortgages. If CUPW is suggesting that they are going to be turned into mortgage lenders, and consumer lenders and credit card lenders, and if they say of course not, well what they are proposing is taking money in on deposit that becomes an expense to Canada Post because they gotta pay interest to the person who has the deposit. Where’s the revenue coming in to cover off the expense of paying interest on the deposit? So it doesn’t make any sense whatsoever.[5]

Footnotes

Posted in Opines | Tagged , , , , ,

Back to Work Legislation Ruled Unconstitutional

The back to work legislation imposed by the Federal Government in 2011 was ruled unconstitutional. What does it mean for the 50,000 workers affected? They feel being short changed again.

April 28, 2016. The Canadian Government Act to resume postal services, the Restoring Mail Delivery for Canadians Act, S.C. 2011, c. 17, was ruled unconstitutional by an Ontario Superior Court Judge and further declared having no force or effect.

In layman’s terms, it means the law was struck from the Canadian Government’s legal code. It no longer exists. Too late for those affected. The purpose it was designed for already accomplished.

Mike Palecek, National President of the Canadian Union of Postal Workers (CUPW) believes “This is a win for workers everywhere.”[1]

A closer look at the judgement shows that Mr Palecek took an optimistic look at something that has far-reaching and potentially negative consequences in the greater Canadian mosaic.

The problem is not in defining the infringement as unconstitutional. The difficulty lies in the remedy to the situation. The judged ruled the law was unconstitutional and declaratory relief was a sufficient remedy. In other words, the law was unconstitutional and nothing more. No slap on the hands to the Government. No apology. No compensation for violating a basic right. Nothing. The Federal Government and Canada Post have said nothing in response. They don’t have to. It doesn’t matter.

This is an unfortunate ruling because Restoring Mail Delivery for Canadians Act forced the CUPW members to choose between ratifying an unfavourable new collective agreement proposed by Canada Post or go into Final Offer Selection – a method outlined in the Act that considerably favoured the employer. Given the choice between two bad choices, CUPW members ratified an unfavourable collective agreement rather than gamble on FOS. CUPW and its members liked neither, as both were not the result of the traditional collective bargaining process – a constitutional right the Ontario Superior Court recognised as being denied.

A remedy should have named 2011 collective agreement being null and no effect as well because it is a direct descendant of this Act.

The judge certainly agreed that the Act interfered with CUPW and its members with signing a negotiated collective agreement in 2011. As found at line [194] of the Judge’s ruling;

The Act abrogated the right to strike of CUPW members. The effect of this abrogation was to substantially interfere with – and to disrupt the balance of – a meaningful process of collective bargaining between CUPW and Canada Post. I find accordingly that the Act infringed the s. 2(d) freedom of association of union members and must be justified under. s. 1 of the Charter.[2]

So why didn’t the Judge logically proceed and state, “Yes, the Act substantially interfered with the collective bargaining process, that the Act infringed the s. 2(d) freedom of association of union members, etc., This Act consequently created a forced agreement that would not otherwise have been produced. Since the collective agreement was created out of a framework brought on by unlawful interference, the 2011 collective agreement is of no effect or force. The previous agreement applies until a resolution between Canada Post and CUPW can be properly made within the confines of constitutional guarantees.”

The Judge has the right to impose such a provision in such cases but declined. However, it is known that most section 24(1) remedies are reserved for individual not corporate or collective entities.[3]

J. Firestone took a narrow definition on when a remedy for Section 24(1) would apply:

“. . . a high threshold that applicants must satisfy before a court of competent jurisdiction will award them Charter damages. Something more than gross negligence is required on the part of government actors, although malice is not required to satisfy the threshold. . . [4]
The Supreme Court of Canada has stressed that s. 24(1) remedies exist for the purpose of compensation, vindication, and deterrence in the face of conduct by state actors. There was no conduct on the part of government officials in this case that would warrant an award of Charter damages.”[5]

Firestone believes gross negligence by the Government when violating the Constitution is not considered a trigger for compensation. This only occurs if a Government representative misapplies, misrepresents, or oversteps their boundaries in applying a law. Theoretically then, the Government agent is no longer representing the will of the Government but own self-interests. This is when a remedy then is triggered.[6]

Marilyn L. Pilkington wrote on the topic of damage and remedy when a violation has occurred in La Revue Du Barreau Canadien and concluded that a four step process must occur in determining a remedy and does not dwell on the idea of agent liability:

  • “(1) What are the purposes of the constitutional guarantee?
  • (2) What other remedies are available to redress the infringement of that guarantee? Do they provide an effective means of vindicating the plaintiff’s rights and deterring similar unconstitutional conduct without interfering disproportionately with the implementation of legitimate government policy? Would a remedy in damages achieve these purposes any more effectively, taking into account who will eventually pay?
  • (3) Was the conduct of the defendants so egregious as to warrant punishment through the imposition of damages? Is there any other mechanism available for effective punishment?
  • (4) Has the plaintiff suffered consequential injuries which should be compensated?”[7]

The final ruling fails to answers these questions and falls more on the subjective opinion of the judge.

The reality of this type of application means that the Government can wilfully violate the Constitution with little fear of any consequences, especially as it relates to collective entities such as labour unions, religious organisations, or corporations. When they do violate the Constitution, as per the ruling on Restoring Mail Delivery for Canadians Act, it took almost five years to determine that it was unconstitutional – too late after the damage had been done by the Act. And when it was determined that damage had happened, only a trite recognition was made in a legal sense, but it makes no difference in application to the problem at hand. In the case of the violation to CUPW and its members, there is no apology or compensation to the 50,000 or so people affected.

Not only this, but such a conclusion demonstrates the Government can enact legislation that potentially violates the Constitution and can continue persistently because only those entities that can afford the time, money, or expertise to challenge can bring correction. Even if they do succeed, it may take years to take a violation off the books. And even when that happens, don’t expect the Government to say sorry or compensate for their wrongful actions.

This is a serious weakness in the Canadian system that can lead to an abuse of power, which happened in the Restoring Mail Delivery for Canadians Act. There has to be a better mechanism in place to control and remedy such abuses. This should be a warning for Canadians to close this loophole before something worse does come down the pipeline.

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  • [1]http://www.cupw.ca.c.cupw.ent.platform.sh/en/posties-win-big-tory-back-work-legislation-ruled-unconstitutional
  • [2] Canadian Union of Postal Workers v. Her Majesty in Right of Canada, 2016. Court File No.: CV-11-436848. 20160428. The Judgement can be downloaded from here: https://canadasmodernpost.files.wordpress.com/2016/04/cupw-reasons-for-judgment.pdf
  • [3] See Marilyn L. Pilkington. Damages as a Remedy for Infringement of the Canadian Charter of Rights and Freedoms. Osgoode Hall Law School of York University. As found in La Revue Du Barreau Canadien. Vol. 62. 1984. Pg. 543 “Canadian courts may be prepared to permit such a third party to challenge the validity of legislation under section 52 of the Charter, but the opportunity to apply for a remedy under section 24(1) of the Charter is limited to those whose own constitutional rights have been infringed.”
  • [4] IBID Canadian Union of Postal Workers v. Her Majesty in Right of Canada, 2016. Line [241]
  • [5] IBID Canadian Union of Postal Workers v. Her Majesty in Right of Canada, 2016. Line [244]
  • [6]See David Stratas Heenan Blaikie LLP, Toronto, Remedies for 24(1) Violations. http://www.davidstratas.com/15.pdf
  • [7]IBID Marilyn L. Pilkington. Pg. 541
Posted in Opines

The Community Mailbox Financial Fiasco at Canada Post

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Canada Post announced in 2013 an estimated annual $400 to $500 million in savings by converting door to door to community mailboxes. It was part of their five-point plan to bring Canada Post into an economically stable future.[1]

However, a change in Government in 2015 halted such plans. They were only able to achieve around 20% of this financial goal.

As at the end of October 2015, we have completed community mailbox conversions for approximately 850,000 addresses across Canada. It is expected that these conversions will contribute an estimated $80 million in annual savings to Canada Post. These were the first conversions of households previously receiving mail at the door and were part of a multi-year national initiative that was to involve up to five million addresses. On October 26, 2015, Canada Post announced that it is temporarily suspending future conversions and will work with the Government of Canada to determine the best path forward given the ongoing challenges faced by the Canadian postal system. As a result, all conversions planned for November and December 2015 and those announced for 2016 were placed on hold.[2]

This is a major change in financial plans by Canada Post. If the company was a publicly traded one, business common sense would immediately require the CEO and board to explain to the shareholders how they would adapt. As of late April 2016, there is no indication by the Government nor Canada Post how they are going to alternatively raise the $320 to $420 million lost in anticipated savings.

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Footnotes:

Posted in Financial

The Call for the Resignation of Canada Post’s President

The Canadian Broadcasting Corporation has posted in-depth coverage of the battle between the new Liberal Government and the Conservative appointed President of Canada Post, Deepak Chopra. Sian Matthews, chair at Canada Post, has written a strongly worded defense for keeping Mr. Chopra at the helm. The response strengthens the present Government’s accusation of their predecessor stocking government boards with party insiders. Matthews was once Stephen Harper’s official agent back in 1993. For more info, click on the following link Canada Post Chair Delivers Sharp Rebuke.

Posted in Opines