Perspective
Facing Pension Issues
FROM:
JAN-FEB 2004 ISSUE | BY JOHN NAGY, FCGA — CHAIR, CGA-CANADA
All of us hope to have a secure and comfortable retirement, spending time with family and friends, doing the things we love. But will that dream actually be realized for the millions of Canadians who have yet to hang up their spurs?
Some individuals may have comfortable corporate or government pension plans to rely on. For others who are
self-employed or working in smaller companies or not-for-profit enterprises, it may be a personal RRSP or other nest egg.
And for all of us, the key question will be — will those
hard-earned assets be generating enough returns over time to finance our retirement dreams? A decade ago, the concern was inflation. Would the plans generate enough income to keep ahead of the rapidly rising cost of living? Today the issues are slightly different.
Journalists, commentators, accounting standards setters, and regulators such as the Office of the Superintendent of Financial Institutions (OSFI) are speaking out about the current state of many Canadian corporate pension plans. There is a worry that many plans may be facing significant funding deficits that have not yet shown up on companies' financial statements.
The numbers are startling. According to recent reports, almost
50 per cent of the pension plans supervised by OSFI have more liabilities than assets. Of that group,
55 per cent are underfunded by more than
10 per cent. Some studies estimate that public and private pension plans, including the Canada Pension Plan, face a combined funding deficit of
$225 billion and may require major injections of cash to get them healthy again — injections that may be as much as
two per cent of Canada's gross domestic product annually over the next
15 years.
The business of estimating pension plan gains, losses, and possible remedial measures is clearly an inexact science. Who can predict accurately how national and international equity markets will perform in coming decades? But like it or not, dependence on those equity markets is what it's all about. The recent market downturn may be over for now, but the weaker stock market performance of the last few years has taken its toll and the pension numbers reflect that.
Another key issue is transparency. How can we make accurate assessments of the health of our corporate pension plans? Can we do so under current accounting rules? At the moment, Canadian GAAP allows what is known as "smoothing", where actual returns on pension assets are not used in calculating a pension's annual position, but rather are smoothed out over a number of years. A
May 2003 report in
The Globe and Mail reported that
104 companies in Canada's Standard and Poors/TSX index had total
unrecognized pension losses of
$26 billion in their defined benefit pension plans at this point in time. Smoothing may be a conservative measure in good times. But in bad times, when we really need conservative measures, it could be masking serious problems.
As the magazine goes to press, the Canadian Accounting Standards Board is set to bring in new guidelines for how companies discuss corporate pension performance. The new rules will not change the principle of smoothing, but will make disclosure more transparent through improved balance sheet discussion and analysis. This is an excellent start.
But what about more fundamental change? Is this something we can expect to see in the near future? The International Accounting Standards Board has the issue of smoothing on its watch list, as has the U.S. Financial Accounting Standards Board. As the debate heats up and general awareness grows, we hope regulators and standards setters will make the right decisions. If they do, when it finally comes time to "put our feet up" and take a well deserved rest, we'll know exactly where we stand.
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