The battle over Stelco pension funds, explained

A decade ago, Stelco survived on a promise that it would make up its gigantic pension shortfall over 10 years.

But the new deal proposed for the survival of Stelco removes the obligation to make up that shortfall.

The new deal proposes that the company will be allowed to make payments into the fund from a variety of sources — all presuming the company continues to operate.

The commitment we get into our pension plan is extremely lean.- Gary Howe, 1005 president

So that leaves a dilemma for the local union chapters, trying to negotiate their part of the deal with the potential buyer.

Do they go along with Bedrock, possibly the company's best chance at staying alive and continuing to make steel (and thus hopefully contributing to the pension fund all the while)? This includes putting some faith that the land not being used for steelmaking can be sold and developed in exchange for more money in the fund.

Or do they hold out for another offer or better terms where a buyer might agree to aim its contributions at that larger shortfall? What if it stops operating, or sells Stelco off?

Despite hundreds of millions of dollars put into the pension funds over the last decade, the shortfall remains and still hovers around $1 billion. The company's former owner, U.S. Steel, is long gone, and Stelco has again been in court-supervised bankruptcy protection since 2014 while it works out a way to move forward.

How is this exactly going to work? Is there a responsible approach to the pension?- Bill Ferguson, president of Local 8782

Now another company, Bedrock, is kicking Stelco's tires. Stelco will seek official court approval Thursday to move forward with a sale to Bedrock, some terms of which were announced last Friday.

A dilemma for the unions

Back to that union dilemma.

The province regulates pension funding activity, because if a business went bankrupt and "wound up" the pension plan tomorrow, the province has a fund that would kick in to help pensioners make up the difference. So it wants to make sure funds are robust and decrease the likelihood of a default triggering provincial help.

Last time it was in bankruptcy, Stelco was allowed to have 10 years under a special exception to top up the pension. This time, there have been some details raised but the unions aren't sure how the province's new rules will work.

"How is this exactly going to work?" said Bill Ferguson, president of Local 8782 representing workers and retirees in Lake Erie, which has signed a "letter of support" pending pension and benefits negotiations with Bedrock.

"What is the regulation change going to look like? How is it going to be invested, who are the investors? Is there a responsible approach to the pension?"

The uncertainty and the deal as proposed may be enough for Local 1005, representing Hamilton workers and retirees, to oppose the deal.

"The commitment we get into our pension plan is extremely lean," said Gary Howe, 1005 president.

'Wind-up' vs. 'going-concern'

Actuaries use two measures to calculate a pension fund's health. One is called "solvency deficiency" and asks this question: If the company ceased to exist tomorrow and the pension plan was "wound up", would there be enough money to keep cutting cheques to the workers and retirees for as long as they live?

The other is called a "going-concern" calculation. That means, if the company takes the money it has now, and continues to make payments toward the fund out of its profits in the years to come, is there enough in the fund to make sure the pensioners would be taken care of?

According to the most recent actuarial report, by that measure the main pension plans were close to fully funded or more than fully funded. But the solvency deficiency would still trigger a major haircut on pension payments were the company to cease operations tomorrow.

So while the deal offers some short-term assurances about pensions, the uncertainty for the unions, in part, comes in wondering what Bedrock might do with the company in the years to come, after it's free from the obligation to make up that larger pension fund shortfall?

Terms for U.S. Steel vs. Bedrock

U.S. Steel was obligated to try to make up Stelco's solvency deficiency when it took over Stelco. It pitched in a chunk of money off the bat and paid annual installments through December 2015. But the economic downturn and other factors overwhelmed the fund and now it's still short.

Fast forward to 2016.

Bedrock, too, is pledging to pitch in some money – about $30 million upfront, with some other streams of money pledged from profits and the sale of the brownfield lands.

But this time, the province is allowing the new company to aim its contributions at meeting that "going-concern" target, not the overall solvency deficiency.

Here's how that was worded in the province's announcement last week of some of the terms of the proposed deal:

"While the new company is committed to making contributions to the pension plans, it is not obligated to fund any deficit in the pension plans for service accrued prior to completion of the restructuring transaction."

The proposal goes in front of Justice Herman Wilton-Siegel in court in Toronto on Thursday.

[email protected] | @kellyrbennett