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.



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