Perspective
A Wake-up Call on Pension Reform in Canada
FROM:
SEP-OCT 2004 ISSUE | BY JOHN NAGY, FCGA — CHAIR, CGA-CANADA
Spectacular collapses sometimes have a knack of helping kick start
much-needed corporate reforms. Fallout from the collapse of companies such as Enron and WorldCom has helped push for greater transparency and accountability in financial reporting and in our capital markets.
Let's hope it will not take a spectacular collapse before Canadian employees, employers, and regulators realize the need for greater transparency and accountability within the country's teetering defined benefits pension plans.
A comprehensive research report released in June by
CGA-Canada found that nearly
60 per cent of defined benefit pension plans are in deficits to the tune of $160 billion. This in-depth study, produced in
co-operation with Mercer Human Resources Canada, is the first major research project completed under the auspices of
CGA-Canada's recently expanded research capacity. And there will be more interesting and timely reports to come from this team, on a variety of key issues for Canadians.
Defined benefit pension plans provide for predetermined levels of retirement income generally based upon factors such as salary history and the duration of employment. These funds are different from defined contribution plans, whose payout is calculated as a function of contributions and returns.
Computed on a solvency basis, the study estimates that Canadian companies would need to make special payments of
$15 billion a year over
five years to make up for the current deficits. That would amount to extra payments totalling
10 per cent of each company's payroll in each of the next five years — a massive drain on a company's cash resources.
It's a sad state of affairs, and
CGA-Canada is not alone in its concern. Four other studies since February have painted similarly dire pictures of the country's defined benefit pension plans.
All five studies have predicted looming social and economic crises for a majority of Canada's plan members and plan sponsors, if something is not done and done quickly. The studies warn that pensioners may have their benefits sharply reduced, and that inadequately funded pension plans may go bankrupt. Shortfalls will also negatively affect corporate financial results and share prices for years to come.
And this funding crunch is coming just as the baby boomer bulge enters its retirement years. That fact could add to our country's pension troubles as some employers find themselves with far more retired workers than active employees.
The problems with current pension plans are widespread and complex. The
CGA-Canada study and others have identified many areas that need reform. All of the studies have found problems with common accounting techniques known as "smoothing," which can distort a plan's actual performance by keeping losses off the balance sheet. They have also pointed to the web of overlapping national and provincial regulations that tend to create problems rather than solve them.
But some of the most pressing concerns stem from problems with transparency. Ambiguities about who owns a pension plan's assets have led to legal disputes between sponsors and members.
Historically, the ownership of surpluses was thought to lie with plan members, while sponsors bore responsibility for a deficit. As a result, companies often find themselves in a
catch-22 situation. If they are in a deficit, they own the deficit; but if they contribute the cash to fix the situation, sponsors simply claim ownership. Until this situation is remedied, companies may choose to run their pension plans at a deficit, with potentially large social and economic consequences.
Air Canada and Stelco have already given us a glimpse of the possible fallout when companies run pensions at a deficit.
Air Canada has since struck a deal with federal pension regulators and its unions to put more cash into the plan to make up the deficit over
10 years instead of the normal
five-year period. But Stelco management continues to demand more cost cuts, saying that defined benefit pensions prevent it from competing with U.S. mills, leaving thousands of jobs and lives hanging in the balance.
Regulators need to address pension surplus entitlement sooner rather than later. Within the current landscape, surplus distribution is not seen as fair, equitable, and reflective. A golden opportunity exists to establish
time-weighted formulas, which take into account the contribution values of members and sponsors. Without a system that promotes greater accountability in Canada's defined benefit pension plans today, we run the risk of turning back on our pension promise tomorrow. And clearly, that is not a situation we wish to find ourselves in. Canadians deserve better.
Similar comments under John Nagy's signature appeared in The Globe and Mail
on
June 15, 2004. For the full
CGA-Canada report Addressing the Pensions Dilemma in Canada, visit our Web site at
www.cga-canada.org.
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