# Court rules against GM cutting retiree benefits



## sags (May 15, 2010)

In what may be a precedent setting case, the Ontario Supreme Court ruled that GM had no contractual right to cut benefits for their retired salary workers.........after they had retired.

GM said they will appeal, but if the decision holds, it would be at least one step forward on retiree protections.

As far as I am concerned, GM should be ashamed of how they treated their salary employees. They just kicked them to the curb.

http://www.cbc.ca/news/business/story/2013/07/17/business-gm-decision.html


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## Spudd (Oct 11, 2011)

I completely agree with this decision. It was an outrage when GM cut their retirees benefits.


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## andrewf (Mar 1, 2010)

Didn't GM declare bankruptcy? Aren't retirees creditors like any other?


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## Four Pillars (Apr 5, 2009)

andrewf said:


> Didn't GM declare bankruptcy? Aren't retirees creditors like any other?


+1 Pensions are private deals between a company and it's employees (or former). Yes, there has to be (and is) regulation to make sure obligations are met, but if the company fails then something has to give.


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## andrewf (Mar 1, 2010)

I already had reservations about bailing out GM, which was tantamount to bailing out GM pensioners and current workers. This gives me more reservations about the future. Next time, government should only provide debtor in possession financing and not any capital injections.


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## HaroldCrump (Jun 10, 2009)

To make it fair, the retirees should owe a certain % of their pensions back to the tax payers. The same % that the bailout represents of their pre-bankruptcy market cap.
This is why govt. bailouts are _so_ wrong - this is a huge moral hazard. It simply reinforces bad behavior on the part of companies and unions.

There is no difference between bailing out rich banksters vs. rich unionized ex-workers.


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## none (Jan 15, 2013)

^ I don't agree with this. Correct me if I'm wrong but isn't it policies of the government that allowed GM to dip into the pension funds to begin with? Because the government played that hand they are responsible.

I think all this 'too big too fail' stuff is ridiculous and just offloads risk onto the taxpayers. These pensions should be paws off so in the event that a company does explode the pension funds are still safe.


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## HaroldCrump (Jun 10, 2009)

none said:


> ^ I don't agree with this. Correct me if I'm wrong but isn't it policies of the government that allowed GM to dip into the pension funds to begin with?


What policies of the govt.?
In fact it is the exact opposite - the domestic auto manufacturers could not have ever hoped for a more _favorable_ and _accommodative_ govt. policy.
For many decades, since the mid 1930s, if not earlier, the US govt. has had extremely accommodative policy towards the auto companies.

Whether it came to labor relations, stifling and preventing foreign competition, foreign trade deals to further their interests, or looking the other way when Ford and GM supplied vehicles and other hardware to Nazi Germany, the govt. has been _most_ accommodative.

If you take away the govt. policy, GM and Chrysler would have dissolved into nothing at least 30 years ago, if not more.

This was their third bankruptcy, no?



> I think all this 'too big too fail' stuff is ridiculous and just offloads risk onto the taxpayers.


I agree !



> These pensions should be paws off so in the event that a company does explode the pension funds are still safe.


Oh là là - and why is that?
Why are they paws off?
They are liabilities on the company's balance sheet as well, just like bond holders (and equity holders for that matter).
Why should they deserve such preferential treatment at the expense of tax payers?

Can I say _paws off_ my tax payer dollars too?
That is fair, no?

Were the tax payers consulted when the company made those stupid deals with the unions decades ago?
Do the tax payers receive a share of their pensions?

You cannot have privatized union deals but socialized losses when the company falls apart.
What has happened with this decision is the same old bad behavior has been validated, accepted, and encouraged.
The moral hazard has been confirmed.

Let's come back in 10 - 15 years time when GM goes bankrupt for the fourth time and see how this has worked out.


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## none (Jan 15, 2013)

I think we've miscommunicated a little here. When I meant paws off I meant that pension funds should be stand alone investments and independent of the company. If the company goes bankrupt all pension funds still exist and are fully funded. None of this 'too big to fail' so pension funds can be dipped into by the company.


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## Four Pillars (Apr 5, 2009)

none said:


> I think we've miscommunicated a little here. When I meant paws off I meant that pension funds should be stand alone investments and independent of the company. If the company goes bankrupt all pension funds still exist and are fully funded. None of this 'too big to fail' so pension funds can be dipped into by the company.


That already exists - the issue in most cases is that the pension fund might be 'underfunded' because of various reasons and the company has to top it up or cut benefits.


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## MoneyGal (Apr 24, 2009)

Pension funding is inherently ephemeral.


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## HaroldCrump (Jun 10, 2009)

none said:


> When I meant paws off I meant that pension funds should be stand alone investments and independent of the company. If the company goes bankrupt all pension funds still exist and are fully funded. None of this 'too big to fail' so pension funds can be dipped into by the company.


That does not prevent stupid companies making unrealistic compensation deals with militant, striking unions.
These liabilities are decades long and very generous in nature.
These companies went ahead and made promises to the unionized workers.

At every subsequent contract renewal, the previous contract became the baseline and the workers expected better and better compensation deals.
Sops and gold plated features were added on over time, such as inflation indexation, survivor pensions, bridge benefits, etc.

Over time, these pension plans became iron fetters for the financial condition of these companies but they have no mechanism to renege on these commitments.
Your "paws off" mandate does not solve this.


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## sags (May 15, 2010)

In reality, the pension money wasn't GM's money. 

Traditionally the contract agreements came due every 3 years, with every 2nd contract dedicated to the pension plan. So, once every 6 years the CAW made the pension plan their negotiating focus and secured agreements whereby the company would deposit a set amount of each hourly earning into the pension plan on behalf of each employee. The compensation for supervisors closely mirrored the union contracts, so everyone had an interest in the negotiated settlements.

This was a good system, until GM lobbied the NDP government for the right to defray their contributions. The government changed the law and granted the request for a handful of what was known as "too big to fail" companies.......all of whom failed.

Immediately, GM stopped contributing to the pension plan and the plan went into deficit. The CAW fought against this change in court and lost.

As the pension deficit started to climb, GM took notice and to hide the problem, they increased the expected return on capital from the pension fund to an improbable 9% annual return. On paper it looked good, but in reality the returns were much lower and even negative, and the pension shortfall continued to grow.

I should point out that salary (non union) management employees were treated much worse than hourly employees, because they had no union to represent them, when GM decided to no longer compensate salary in accordance with negotiated settlements with hourly workers.

Annual increases were denied for years and years, with the promise the money was being paid into their own pension fund and would be there when they retired.

When I first started at GM, a supervisor would earn a "set" amount of 10% more than the highest rated hourly employee under their direction. The most coveted supervisor jobs were over skilled trade employees.

By the time I retired, 30 years later, supervisors earned significantly less than hourly employees, and were working unpaid overtime hours as salary employees.

Then.............GM arbitrarily changed the rules.............AFTER they retired.

As noted by the judge in his ruling, if they wanted to change they should have given advance notice so retirees would be aware and could prepare for it.

To stick it to someone after they are gone..........is disgusting.

GM's problems started when they got rid of the "car guys" in upper management and turned everything over to the "bean counter" guys. The effects became immediately apparent. Cutting costs in customer service, car design, and the capital purchase of new technology. Hence a stream of cheaply made..........poorly engineered vehicles with thin aluminum blocks and Aztec, Lumina car designs. And of course the foray into the "highly lucrative" subprime mortgage market, and the selling of the profitable links in their production chain (Delphi and GMAC) were also the legacy from the bean counters.

Just before they crashed, GM got rid of the bean counters and brought the car guys back into management. It was too late for the company by then, but the successful new models that GM is selling today are a result of the car guys initial vision and work.

Just shows........you can't cut your way to prosperity, and companies should stay with what they are good at.

I remember in semi-annual state of the company meetings hearing..........."We are no longer a car company. Now we are a mortgage company that just happens to make cars"

Yea............that worked out well.


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## andrewf (Mar 1, 2010)

none said:


> I think we've miscommunicated a little here. When I meant paws off I meant that pension funds should be stand alone investments and independent of the company. If the company goes bankrupt all pension funds still exist and are fully funded. None of this 'too big to fail' so pension funds can be dipped into by the company.


This would make pensions so cost prohibitive, you'd effectively be banning them.


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## HaroldCrump (Jun 10, 2009)

sags, what you are describing is all an employer/employee matter.
What the company decides to pay its employees, and what the employees are willing to accept should not be a tax payer concern.

I agree that a company should not be allowed to dip into the pension fund since (as you said), it aint their money.

But at the same time, there has to be a mechanism for a company to change its compensation model over time.
If it is not doing well, it should be able to lay off workers, cut production, reduce compensation, reduce benefits (incl. pensions).
The collective bargaining (by the UAW and CAW) prevent this normal functioning of the market.

For many years, the company was prevented from cutting pensions for new employees.
It has finally happened now after 3 bankruptcies and 3 bailouts that new hires are making less pension and benefits than 20 years ago.
But IMO, these changes should have happened 2 decades ago.
And the changes don't go far enough anyway.

If we prevent companies from making structural changes, and then bail them out using tax payer money, this is exactly what we will get time after time.
If you keep bailing out "too big to fail" corporations, don't be surprised if "too big to fail" corporations keep failing like clockwork.

If bailing out GM & Chrysler was ok, then by the same token, it was ok to bail out the banksters like Bank of America, Goldman Sachs, and Citibank.


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## none (Jan 15, 2013)

andrewf said:


> This would make pensions so cost prohibitive, you'd effectively be banning them.


Not at all. This is how defined contribution pensions work. 

When I had the choice of a DC or a DB I chose the former simply because I didn't trust the company I worked for to be there in 40 years.


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## fraser (May 15, 2010)

The reality is that many, many Canadian companies have moved to eliminate extended health benefits for future retirees and have also moved to DC plans. And some of these DC plans have had their company match reduced over time. 

I know of one multinational IT company whose US DC employer match is determined by their quarterly performance...ie there is not really a guarantee of any matching.


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## sags (May 15, 2010)

Harold,

I agree government's should stay out of the business for profitable companies, but it was government intervention that created the problem.

As to bailouts to save unprofitable, but clearly important businesses for the overall economy, governments have to weigh the cost and benefits of the situation.

In GM's case, the government loaned GM capital and in return they received shares in the company, which are worth what they are worth, saved the total destruction of the Ontario Pension Guarantee Fund, and in addition continue to collect the taxes and revenues from the hundreds of thousands of Canadians who would have had their employment interrupted by failures in our auto industry manufacturing sector.

In aggregate, I would think the combination of shares, continuing revenues, and savings from unemployment and welfare benefits exceed the cost of the bailiouts, and will continue to do so over time.


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## sags (May 15, 2010)

andrewf said:


> This would make pensions so cost prohibitive, you'd effectively be banning them.


Unless the pensions promised can effectively be funded.........they should be banned.

Government's could play a role in this, by demanding that companies live up to their promises..........or don't make them.

Instead, they allow companies to make the promises and then change the law to accommodate not keeping the promise.

What is unfair...........is to promise to divert earnings into a pension plan...............and then fail to do so.

If a company said to you.........instead of giving you a raise this year, we are going to put it into a pension plan for you, and then failed to do so...................would you continue to work for that company? Maybe, but it should be your choice.

As the judge noted.............GM should have been forthright and honest with their management staff, not cut their benefits after they have performed their services and are gone.


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## HaroldCrump (Jun 10, 2009)

fraser said:


> The reality is that many, many Canadian companies have moved to eliminate extended health benefits for future retirees and have also moved to DC plans. And some of these DC plans have had their company match reduced over time.
> I know of one multinational IT company whose US DC employer match is determined by their quarterly performance...ie there is not really a guarantee of any matching.


There are ever increasing instances of mega-large corporations switching from DBP to DCP for their employees.
Manulife switched in 2007 (I think) and RBC switched in 2012.
Many others have hybrid models.

About the only places you can find true defined benefit plans in the private sector are monolithic utilities such as Trans Canada, Union Gas, Trans Alta, etc. and the vast majority of them are under-funded.
Some are underfunded at a dangerous level (i.e. below 80%).
That being said, I believe a 2% (+/-) change in the assumptions of future interest rates can cause wild swings in the funding status of a plan - making it look worse (or better) than otherwise.

All said and done, the vast majority of private sector corporations do not offer any DBP plans, funded or otherwise.
Unfortunately, unionized public sector workers live on a different planet and can never understand this.
Their attitude is "_Let them eat cake_".


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## HaroldCrump (Jun 10, 2009)

sags said:


> Unless the pensions promised can effectively be funded.........they should be banned.
> Government's could play a role in this, by demanding that companies live up to their promises..........or don't make them.


On principle, I can agree with that.
However, in practice, it aint so.
Private corporations subject to the vagaries of the global market cannot (and IMO should not) be expected to sign up for decades long pension liabilities based on a bunch of assumptions, and have no legal recourse to renege on those commitments when circumstances change dramatically.
Just like every other aspect of business, employee compensation has to be flexible enough to adapt to changes.
Unions prevent that.

It seems that twist and turn as we might, we come back to the same core - that govt. (aka tax-payer) must be involved in pension regulation, that govt. (tax payer) must be willing to bail out all corporations that are not able to meet pension obligations, that govt. is the ultimate back stop for defined benefit pensions.

OK, fine, is that's the case, why don't we get rid of all this insanity and have a single, comprehensive, universal defined benefit pension plan for all working Canadians, regardless of public sector or private sector, unionized or non unionized.
Oh wait...we already have one - it's called the CPP.
All workers pay into it, collect from it, and for nearly 75% of the workers, that is the _only_ pension they have.
So why don't we cut out all these pensions plans (and all the administrative overhead) and have a consolidated pension system under the CPP.
What is good for the goose is good for the gander.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> This would make pensions so cost prohibitive, you'd effectively be banning them.





none said:


> Not at all. This is how defined contribution pensions work.


But none, surely you realize there is a world of difference between a DCP and a DBP in terms of the liability to the company.
If you (and perhaps the Ontario Supreme Court) are saying that the pension fund has the first claim on the assets of a company in the case of dissolution of business, the most immediate impact is on the corporate bond yields.
The corporate bond yields need to reflect this claim and get re-priced based on this.
The cost of capital will have to go up significantly for corporations that offer defined benefit pensions.


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## Berubeland (Sep 6, 2009)

My thoughts are that the companies should never be allowed to take money out of their retirement plans and use it for other uses or fail to put in their share when the workers do put in their share. 

I also get really upset when our own government puts EI surpluses into general revenue rather than reduce the premiums or give back surpluses. 

There is a fundamental lack of respect for retirement funds. The workers contribute to that fund and the company contributes to that fund. 

I am self employed. I have no retirement fund. I also don't have to put up with bullshit to keep my job and benefits. This is a trade off people make. Those people who make that trade-off should get the reward for those choices.


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## Daniel A. (Mar 20, 2011)

As one who worked in the private sector my DB pension is 100% fully funded and held by a third party.
I don't have the generous extended health benefits that many enjoy but then I'm not worried about the health of the pension fund. 

Today new hires now have a DC plan.
In the case of GM many mistakes have been made.
When you have four retiree's for every worker something has to give.
There were a number of strikes that held auto companies hostage to demands that were not viable.

Allowing funding holiday's is a recipe for disaster that compounds.

We have seen the same thing with Air Canada, the steel industry, and many others.

It won't be long before DB pensions are gone completely in the private sector.
I'm grateful for mine and the fact the fund is topped up every year.


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## sags (May 15, 2010)

We should also not forget that pension plans went through the same recession as everyone else and took enormous losses to their capital.

The HOOPP pension was severely underfunded for a couple of years, made some changes and their investments have turned around to the point they have a surplus today.

I read somewhere that a 2% increase in interest rates has a huge influence on pension plans.


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## Eclectic12 (Oct 20, 2010)

none said:


> I think we've miscommunicated a little here. When I meant paws off I meant that pension funds should be stand alone investments and independent of the company. If the company goes bankrupt all pension funds still exist and are fully funded. None of this 'too big to fail' so pension funds can be dipped into by the company.





Four Pillars said:


> That already exists - the issue in most cases is that the pension fund might be 'underfunded' because of various reasons and the company has to top it up or cut benefits.


With US being included - are you listing under the "various reasons" the company redirecting pension money to pay operational costs including executive pay/bonuses (Hostess in 2011)? The company borrowing pension money to pay for buyouts of active employees (GM in 2009)?

http://www.alternet.org/corporate-a...ts-company-took-employees-pensions-and-put-it
http://www.thetruthaboutcars.com/2009/03/gm-raids-pension-fund-for-buyouts-veba/

In these situations, bankruptcy can be attractive as:



> Ironically, if you borrow money to pay for your education, you can’t get rid of that debt through bankruptcy – one of the “reforms” of the bankruptcy law during the Bush era.
> But if you’re a CEO or a buyout bankster and you borrow money from your employees’ trust fund to be able to cover your own paycheck and million-dollar bonuses, and then take your company into bankruptcy, neither you nor the company have to pay those employees back even a single penny.


If you read the details of the Hostess article, even after bankruptcy was file for, millions were pulled out of the bankrupt company to pay for the executives a bonus.


Then too, according to the Wall Street Journal:



> A little over a decade ago, pension plans had $250 billion in surplus assets. But employers siphoned billions from the pension plans to pay for restructuring costs, often by providing additional payouts in lieu of severance, and by withdrawing money to pay retiree health benefits -- and in some cases parachutes for executives.
> 
> When the market cratered in 2008, there was no surplus to cushion the blow, and today, pensions collectively are underfunded by 20%.
> 
> ...


http://online.wsj.com/article/SB10001424052970204138204576605482876191482.html


Cheers


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## My Own Advisor (Sep 24, 2012)

I'm still annoyed that taxpayers bailed out GM. Stupid idea.


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## jmarks (Feb 14, 2012)

This whole issue of DB pensions seems to be a real sore spot for a lot of people, and people are mixing a whole lot into the subject.
It's pretty simple for me, I've worked for a public company for 31 years now and was promised a pension if I put my best foot forward and did my job(no different than my pay check, just further out). I've done my part and been a productive employee and now it's the companies turn to meet their part of the deal. A few points I'd like to make on the subject are

- The Government has no business bailing out ANY company.

- DB pensions where designed by business and the people to provide a benefit to the workers after many years of service, so that they could retire in relative comfort without government aid. Yes people planned their lives around this promise so they get a little cranky when a company doesn't meet their obligation.

- Since then companies realized that model costs them a lot of $$. So in many cases they have changed the model to be more affordable to the company, that's just life and progress.

- The government has NO business changing the laws so business doesn't have to meet their current obligations to pensions, operating, environmental, shareholders, etc. In Alberta companies can now apply for relief and instead of making up deficits in three years as per the law, they can instead can apply for a 10 yr. relief deal. The company I work for already took up the feds deal a few years ago to defer payments. That just isn't right period, and imo for a company that is making record profits it is downright greedy and irresponsible. But hey the Gov. is sticking their noses in where they shouldn't be and allowing it.

- Back a few years ago when the interest rates were higher and the market was hot companies didn't have to add anything to meet future funding requirements. You didn't see them putting cash in the kitty in case things changed and returns dropped. No they figured they had a free lunch and added NOTHING to the pension plans. You didn't see the Gov. tell them they should think ahead and put a set amount into the fund in anticipation things may change.

- The whole subject of Unions really has nothing to do with DB pension plans other than the fact they will fight management to ensure management lives up to agreements made. Unions and how they operate is a different subject all together! 

- It's a fact that government DB's are paid for by the taxpayer. Should they have them, are they excessive, do they deserve them? Again that's a whole different topic.

In a nut shell I'm expected to meet my obligations and have done so, at times it was hard but none the less I made it through. Companies should be no different; they make a promise and should keep it regardless of issues.


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## Eclectic12 (Oct 20, 2010)

jmarks said:


> This whole issue of DB pensions seems to be a real sore spot for a lot of people, and people are mixing a whole lot into the subject ...
> 
> - DB pensions where designed by business and the people to provide a benefit to the workers after many years of service, so that they could retire in relative comfort without government aid. Yes people planned their lives around this promise so they get a little cranky when a company doesn't meet their obligation.
> 
> - Since then companies realized that model costs them a lot of $$. So in many cases they have changed the model to be more affordable to the company, that's just life and progress ...


Since this discussion includes the US, you do realise that corporate raiders bought companies at times based on laying off the staff to fatten the pension fund surplus and then drained the surplus, right?

It was making enough money that in Ontario, Mike Harris's provincial gov't proposed changes to the pension legislation that would open the same money making opportunities from buying companies & draining the pension surplus. I forget which newspapers wrote against the idea at the time but it had several examples spread across five states.

And that's ignoring the pensions where contributions and/or surplus were redirected to pay for operations and/or executive compensation. 

As well, the claim is that the Detroit Free Press outlined that for the GM pension, the swing from an end of 2007 $20 billion surplus to a late 2008 deficit of $12.4 billion - investment losses were only $11.3 billion. It should have had a $8.7 billion surplus. The problem around $20 billion as used to fund a range of attrition programs, retirement incentives and bankruptcy deals. 


Cheers

Cheers


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## fraser (May 15, 2010)

Absolutely. And one way that they drained those pension funds was through large severance payments and by substantially increasing the pension entitlements, and paying them, to corporate executives. 

Check out the book Retirement Heist...it is about large US companies that did, and continue to do exactly this.


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## Eclectic12 (Oct 20, 2010)

fraser said:


> Absolutely. And one way that they drained those pension funds was through large severance payments and by substantially increasing the pension entitlements, and paying them, to corporate executives.
> 
> Check out the book Retirement Heist...it is about large US companies that did, and continue to do exactly this.


The part I liked is when writing about such actions, a couple of articles indicated that "while technically being legal" the money was drained to sent to executive pay.

What could possibly be wrong with telling employees that the pension is not affordable and/or solvent when a big chunk of the deficit went to pay for executive pay?


Cheers


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