Feds take tough stance on pension fund relief

Finance Minister Jim Flaherty speaks during Question Period in the House of Commons on Parliament...

Finance Minister Jim Flaherty speaks during Question Period in the House of Commons on Parliament Hill, June 5, 2012. (REUTERS/Chris Wattie)

Louise Egan and Susan Taylor, Reuters

, Last Updated: 5:38 PM ET

OTTAWA/ TORONTO - The Conservatives are taking a different tack than Washington on the thorny issue of helping companies fund their widening pension gaps, shrugging off corporate pleas for relief even as the United States lets businesses slash their contributions.

A frightening prospect for workers, retirees and companies, yawning pension deficits have gone from arcane accounting entries to front page news on fears that massive shortfalls could even cause some corporations to fail.

As a growing number of employers look to roll back benefits to the alarm of unions, others are pouring cash into their pensions funds only to see the hole get deeper.

With no sign the problem is going away any time soon, six big Canadian corporations have banded together to ask the government for measures such as more time to pay down deficits in their defined-benefit pension plans.

But the federal government, which provided companies with three rounds of pension funding relief between 2006 and 2010, has no plans to do the same again.

“We’re not looking at any changes,” Finance Minister Jim Flaherty told Reuters in a recent interview in California.

“At the end of the day, these are pension funds that need to be worked out between the employers and their employees. It’s a private matter, except that there’s a legislative vehicle in place, if they want to follow the distressed pension plan model. There’s a way of proceeding,” he said.

Flaherty was referring to 2010 reforms that relaxed funding rules for stricken plans but which some say don’t go far enough to address the fundamental problems companies face.

Canada is not unique, and as in the United States, generous public sector pensions are a hot-button issue. But the federal government is taking a more hands-off stance than U.S. President Barack Obama, who signed a bill last month that changes how companies calculate what they must contribute to their pension funds, effectively allowing them to pay less.

“I have heard of some very large sponsors here who are saying: ’What the heck, look at what they’re doing down there. Don’t our finance ministers understand that the world has changed? That long bond yields are very low?,” said Ian Markham, senior consulting actuary at Towers Watson Canada.

“The U.S. gets it, Denmark gets it, the UK are thinking about it, so we need to do something here,” he said, repeating company arguments.

Even some of Canada’s provincial governments, which regulate pensions within their jurisdictions, have various forms of funding relief in place.

Softening the rules implies letting plans stay underfunded for longer, a risk financially prudent Ottawa may be reluctant to accept. After all, the country’s conservative banking culture helped it survive the global financial crisis better than most.

As in other countries, the scope of the Canadian problem is huge. Ninety percent of the roughly 400 defined-benefit pension plans overseen by Canada’s federal regulator are underfunded, meaning they cannot meet their liabilities should their plans be wound up today, as is required by law.

Air Canada’s is perhaps the most extreme example, with its eye-popping $4.4 billion pension shortfall raising “grave existential questions” about the future of the company itself, according to Michel Picher, an arbitrator who settled a labor dispute there in June.

LOW YIELDS

The problem for most companies arises from historically low yields on investments, and that is expected to last for some time yet.

Long-term Canadian government bond yields hit record lows last month, with some forecasters predicting they could sink further as major central banks ease monetary policy to battle the global economic slowdown.

These lower returns mean companies must put aside more money for their pension funds to cover what they owe in the future.

The federal Conservative government may make an exception for Air Canada, which could be in serious trouble unless Flaherty extends a cap on special pension payments that is set to expire early in 2014.

But that is a standalone agreement with one company. Others want in the game too.

The six companies — branding themselves the “G6” — have joined forces off and on since 2004, and this year again lobbied for temporary relief, said Canadian National Railway Co spokesman Mark Hallman. That was denied in the federal budget in March.

“The G6 was looking for measures similar to what had been approved in other Canadian provinces such as the 10-year amortization period (as opposed to five) for solvency special payments,” Hallman said.

The other companies in the G6 are Canadian Pacific Railway , telecom providers Bell Canada and MTS Allstream, Canada Post and NAV Canada.

DISCOUNT RATE

Historically, Canada has preferred relief measures such as lengthening amortization periods. Permanent rule changes in 2010 let companies average their solvency ratios over a three-year period instead of one, so that a sudden bad year doesn’t force them to make big cash infusions.

But some critics say it is dancing around the real problem - the very low “discount rate” used to assess a plan’s solvency, which is the focus of the recent measures in the U.S., Denmark and Sweden. This rate, based on long-term government bonds, helps actuaries judge how much assets will earn over time.

Companies complain the rate has never been lower and artificially inflates a plan’s deficit. The lower the discount rate, the bigger the deficit.

Air Canada’s chief financial officer, Michael Rousseau, told analysts on a recent conference call that a 1.5 or 2 percentage point rise in the rate would eliminate more than $3 billion from the airline’s deficit.

That wishful thinking effectively became reality last month, not for Canadian companies but for their U.S. competitors. The new law there lets companies use a 25-year average of the discount rate rather than two years.

In Europe, Denmark and Sweden have tinkered with how the discount rate is used and the United Kingdom is thinking of following in their footsteps.

But Jacques Lafrance, president-elect of the Canadian Institute of Actuaries, says the idea would be seen as too risky in Canada.

“I know that some companies are looking for that. My reading of the situation is the federal government doesn’t seem to be interested,” he said.

“At the end of the day it’s a political decision. If you’re a politician and you do allow more funding relief ... you increase the risk of the company going bankrupt and you will have retirees knocking at your door complaining that they will have pension cuts.”

LESSONS FROM NORTEL

Politicians haven’t forgotten the case of one-time high-tech titan Nortel Networks, whose messy 2009 bankruptcy led to angry protests by retirees who felt they’d been shafted.

Bob Farmer, who represents 250,000 pensioners as president of the Canadian Federation of Pensioners, says softer rules for companies mean bigger risks for workers. Tough luck about the low yields, he says. “That happens to be the world we’re living in.”

Companies certainly aren’t waiting around for answers from Ottawa, resorting to various ways of shrinking deficits with mixed results.

CN and CP have made voluntary contributions to their pension funds, on top of special deficit payments that are required by law, and Bell Canada switched to a defined-contribution plan for new employees in 2004.

Still, the problem is not solved and there is no quick fix for policymakers.

“The biggest social issue in the next 10 years is going to be pensions,” said Rick Robertson, associate professor at the Richard Ivey School of Business, part of the University of Western Ontario.

“What do I tell the 64-year-old person who may not have a chance to rebound if the company doesn’t succeed. Who’s my duty to? There’s no easy answer.”

Canadian companies grappling with big pension deficits

Some of Canada’s biggest companies are grappling with multibillion-dollar deficits in their federally regulated defined benefit pension plans.

Canada’s conservative pension funding rules at the federal level require pension plans to hold enough assets to cover liabilities in the case of a plan termination. As of December 2011, solvency valuations showed 90 percent of plans were underfunded.

It’s a burden that does more than weigh on balance sheets and worry accountants. The liability can affect credit ratings, make it more expensive to borrow money, crimp competitiveness, and dent stock valuations.

Here are some examples of federally regulated pension plans with sizeable deficits on a solvency basis:

Air Canada - The country’s biggest airline faces daunting pension problems. Its estimated deficit at the start of 2012 doubled to $4.4 billion from a year earlier.

The 75-year-old flag carrier is asking the government for a decade-long extension of a moratorium on payments, to 2024, to erase that deficit. The money-losing airline has also struck new labor deals that should trim an estimated $1.1 billion from the deficit.

Canadian National Railway Co - The country’s largest railroad has a pension deficit of about $1.3 billion, based on a Dec. 31, 2011 valuation.

Since 2010, the Montreal-based carrier has made voluntary contributions of $1.1 billion as a form of pre-payment against required solvency payments.

In the first quarter of 2012 alone, it put $450 million toward future solvency funding requirements and is now mulling an additional $250 million in such payments this year, due to uncertainty around future plan returns and interest rates.

At June 30, its voluntary funding was seen as sufficient to meet solvency payment requirements to the end of 2014.

Canadian Pacific Railway Ltd — Canada’s No. 2 railway has put $1.9 billion toward its deficit over the last three years, without solving the problem. “We still have a substantial deficit, which is expected to grow,” company Vice President Peter Edwards told the Canadian Senate recently. “This is not sustainable.”

Calgary, Alberta-based CP is now in labor talks with a government arbitrator and its 4,800-member Teamsters union, whose members were legislated back to work in May after a nine-day strike. Pension plan costs are expected to play prominently in negotiations for a new contract.

CP, which is under pressure to improve its performance after a boardroom coup this spring, does not disclose solvency deficit figures.

Canada Post - The postal service’s pension deficit rose about 45% to $4.67 billion in 2011 from $3.2 billion in 2010. The government-owned mail carrier said the situation was “concerning”, but 2010 changes to pension legislation allowed it to seek relief on solvency deficit payments.

For 2012, it was required to put more than $900 million toward its going concern and solvency deficit, but deferred the bulk of that, contributing $61 million to the two types of pension deficits. The going concern valuation assumes a fund continues indefinitely, while solvency calculation assumes the plan shuts down.


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