A record number of Canadian companies have been forced by the global economic recession to liquidate or restructure their operations. Hidden behind these bankruptcy statistics are a growing number of insolvent companies with underfunded pensions. There is no current data, but practitioners say they have never before seen so many companies land in bankruptcy proceedings with pension deficits.
Ian Markham, a director with pension consultant Watson Wyatt Worldwide , estimates the average Canadian business pension plan is 20 per cent short of the assets they need to fund their long term pension obligations. That deficit adds up to about $50-billion, a staggering IOU that he says is crippling a number of companies.
"The pension burden has proven to be too great," said Mr. Markham.
Corporate pension plans that are still standing face unprecedented stresses. Their deficits loss are squeezing employers at a time when pension costs are soaring as retirees live longer and an aging work force nears retirement. Staggering under this weight, businesses are lobbying federal and provincial governments to relieve their burden.
- How big is the pension burden for companies in Canada today?
- What do they want Ottawa and the provinces to do to fix the problem?
- Why is the corporate pension system in such bad shape?
Ian Markham, an actuary with 30 years of pension consulting experience, took reader questions in a live discussion.
Ian Markham is Director, Pension Innovation, for Watson Wyatt in Canada, co-ordinating the development of Watson Wyatt's pension-related innovation, tools and research. Ian provides strategic advice to several major pension plans in the private and public sectors - including plans that are sponsored by corporations and multi-employer plans that are jointly sponsored by members and employers. He was an Expert Adviser to the recent Ontario Expert Commission on Pensions.
Questions and answers from the discussion
Claire Neary: Do you agree that there is little future for company pensions in the private sector?
Ian Markham: We need to look at the evolution of the role of pension plans. Many years ago, defined benefit plans were viewed by companies as part of the employees' compensation package. However, given the average cost and size of these plans, more and more private sector companies have come to regard them as a financial subsidiary whose risks are too large to be effectively managed under the current legislative environment. I believe that many companies are waiting to see what legislative pension reform packages are introduced by governments across the country in 2010. If solvency deficits can be paid off over 10 years on a permanent basis going forward, rather than the 5 years typically required today, I expect this would actually entice many companies to keep their defined benefit plans rather than switch to the other major kind of pension plan known as defined contribution (rather like a whole lot of individual RRSPs). However, I am sure that we will see very few new traditional defined benefit plans set up, if the company alone is on the hook for deficits. The focus today is naturally on the very difficult situation that is faced by a number of today's pensioners and older plan members, as we have witnessed in the stories in this Globe & Mail series - but we shouldn't lose sight of the ability for today's younger workers to be able earn a modest if not decent pension in the future, and that ability depends on the willingness of companies to keep their pension plans going for many years.
Claire Neary: Why did so many pension plans give large pension improvements and take contribution holidays in the late 1990's when there were pension surpluses available? Why didn't they save those surpluses for a rainy day?
Ian Markham: You have got to put yourself in the mindset of the late 1990s, when the financial picture was looking rosy. Pension plan surpluses were common and quite large. While there was always the possibility of a stock market correction at some point in the future, investors did not expect it (otherwise the market would not have continued to grow the way it did). Defined benefit plans were increasing in size, and there was increasing attention on risk management, but there was still a fundamental belief in the long term strength of the global stock markets. Solvency funding was not in focus then, because solvency liabilities were determined based on higher bond yields than today and were therefore quite low. So the vast majority of pension plans assumed that either benefit improvements were affordable or that companies should access some of that surplus. It is easy with hindsight to criticize this mentality. But the market did not see what was coming, so it is hard to expect that individual companies could have planned for it. If you look at it today, however, we have had two major market corrections within a period of six years, and at last we have all learned that it can happen again and soon. The focus needs to be on better management of these defined benefit plans going forward.
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