Commuted Value:  Context and Implications

       In their 2012 contract negotiations Ford then GM convinced Unifor to give retiring workers the option of taking the commuted value or lump sum equivalent of their defined benefit pensions instead of receiving a monthly defined benefit pension for the rest of their and their spouses’ lifetimes.  Since then a growing proportion of the workforce at GM have decided to take that option.

        Many workers see no problem with this.  They welcome getting a choice between the immediate payment of a large lump sum of money and a defined monthly pension for the rest of their life and the life of a surviving spouse.  But little is being said about the many problems that develop when growing numbers of workers opt to take the commuted value of their defined benefit pensions.  The most readily obvious is the possibility that the lump sum will be quickly spent leaving a retired worker and his or her spouse with no retirement income beyond very inadequate government pensions.

        Other less obvious but very real problems that arise when growing numbers of workers opt to take the commuted value of their defined benefit pensions.  One is that choosing this option generates a big windfall for employers who get to unload the “legacy costs” associated with defined benefit pensions.  Indeed, Unifor facilitated this growing windfall for them evidently without getting anything in return and later reinforced what’s now a trend rejecting defined benefit pensions by agreeing to defined contribution “pensions” for new hires.

       A less obvious problem when growing numbers of retiring workers take the commuted value option is that choosing it typically goes together with another choice.  The other choice is to start working for a new employer in order to continue to earn a wage which very often is a minimum wage or little better. 

      What’s wrong with this?  What’s wrong is that autoworkers fought in 1950 to win defined benefit pensions so that they have an income for life sufficient to live on without having to work.  It means the commuted value option is facilitating a situation where a great many “retired” autoworkers see a financial need to work for years and years after leaving the auto industry.  Significantly, this compounds the effect of the Ontario legislation that ended mandatory retirement at age 65 because it is similarly conducive to workers working till they die greatly benefiting employers.

      The commuted value option is also having the unintended effect of severing large numbers of autoworkers’ relationship with the union that first negotiated defined benefit pensions in 1950.  Workers who take the commuted value of their defined benefit pensions rather than a monthly pension benefit have no option to have retired members’ union dues deducted from a monthly pension benefit.  Absent this very few workers opting to take the commuted value make the effort necessary to go to a union hall and pay union dues.   Consequently, they stop being members in good standing of their union. Thus, taking the commuted value option usually becomes synonymous with effectively ceasing to be part of the life of the union.

       This is a prescription for the eventual disappearance of viable retired workers chapters.  This is shown by the fact that in Unifor nearly every functioning retired workers chapter is comprised of autoworkers with defined benefit pensions.  Eliminate defined benefit pensions and retired workers chapters will vanish because defined benefit pensions are effectively the lifeblood of retired workers chapters.  Furthermore, insofar as retired workers chapters are invaluable reservoirs of history and experience within a union like Unifor that history and experience will stop being readily available to active workers who could benefit from it.

     These things define the context and implications of the commuted value option in auto.  They show that its widespread acceptance in Canada’s auto industry is consistent with and conducive to the ongoing retreat of Unifor as a social and economic force drawing its strength from both active and retired members and which should be focused on building on past gains like defined benefit pensions not helping them to disappear.