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Pensions: a hollow crutch: Globe & Mail article by John Nagy
By JOHN NAGY
Tuesday, June 15, 2004 - Page A21
Spectacular collapses sometimes help kick-start much-needed corporate reform. Fallout from the collapse of companies like Enron and WorldCom has helped the push for greater transparency and accountability in financial reporting and in our capital markets. Let's hope it won't 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 study by the Certified General Accountants Association of Canada, released last week, found that nearly 60 per cent of defined-benefit pension plans are in deficit to the tune of $160-billion. Defined-benefit plans provide for predetermined levels of retirement income based on factors such as an employee's salary history. By contrast, payouts in defined-contribution plans are calculated as a function of contributions and returns. While defined-contribution plans are easier to administer, and let employees control their pension assets, they transfer significant risks to plan members.
Computed on a solvency basis, our 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. Of course, there wouldn't be such a gap between what employees count on for retirement and what's actually in their pension funds if there were clearer regulations about who owns pension-fund surpluses and who has responsibility for deficits.
It's a sad state of affairs, the CGA-Canada's study is just one of many predicting social and economic crises for a majority of Canada's plan members and plan sponsors if something is not done quickly. These studies warn that pensioners may have their benefits sharply reduced, and that inadequately funded pension plans may go bankrupt. Shortfalls could also hurt corporate financial results and share prices for years to come.
This funding crunch is coming just as the baby-boomer bulge enters retirement. That fact could add to our country's pension troubles as some employers find themselves with far more retired workers than active employees.
All 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. So companies are in a Catch-22: If they're in a deficit, they own the deficit; but if they contribute the cash to fix the situation, sponsors simply claim ownership. Until the situation is fixed, companies may choose to run pension plans at a deficit, with considerable consequences.
Air Canada and Stelco show what can happen when companies run pensions at a deficit. Air Canada has recently 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 from employees, 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 the question of who is entitled to decide on the use of pension surpluses -- and sooner rather than later. At present, surplus distribution is not seen as fair and equitable. Now is the time to establish formulas which take into account the contributions of members and sponsors. Without greater accountability in Canada's defined-benefit pension plans today, we risk turning back on our pension promise tomorrow.
John Nagy is chair of the Certified General Accountants Association of Canada.
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