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The electronic ticker display outside the Toronto Stock Exchange Tower in Toronto, is photographed after the market closed on Jan., 24, 2022.Christopher Katsarov/The Globe and Mail

We talk about the bite Canadian corporations will take when rising interest rates increase their debt payments. We talk less about a gigantic benefit: Companies’ defined-benefit pension plans have jumped solidly into the black by billions of dollars in the aggregate.

Coupled with a wave of recently relaxed government regulation that failed to foresee the rise in rates, most companies will get to take a multiyear funding holiday, boosting their cash flow. Investors are set to benefit – even as workers continue to lack protections in case things turn yet again in the other direction, as they so often do.

The analysts at Veritas Investment Research have been tracking pension deficits at companies in the S&P/TSX 60, the index of Canada’s largest corporate concerns, since 2007. Their constant warning was that companies’ profitable income statements failed to reflect chronic pension underfunding – and the cash payments companies would need to make to play catch-up, rather than risk failing to pay the promised benefits.

In the last two years, things have turned on their head. In a new report from analysts Dimitry Khmelnitsky and Josh Sangha, Veritas says that in the aggregate, the pension plans of companies in the S&P/TSX 60 are in surplus now for the first time since Veritas began tracking data in 2007. Veritas estimates they will get a benefit of nearly $44-billion in two years largely from rising interest rates – swinging from a $14.7-billion deficit at the end of 2020 to a projected $29-billion surplus at the end of this year. That forecast is based on rates staying at March levels through year-end; more increases would bring more benefits.

It’s astonishing, but it’s the way pension math works. A plan’s funding level is the ratio of its assets to its liabilities, which are the estimate of the future benefits owed to plan members. That’s a stream of payments long into the future, and to express it in current dollars, you have to use an interest rate to discount them.

Perhaps counterintuitively, the smaller the interest rate used to discount, the bigger the liability. And pension-plan sponsors have been complaining for years that historically low rates have overstated what they owe and made their funding levels look worse. Companies injected tens of millions, sometimes hundreds of millions, of dollars into their plans to catch up.

So governments began to relax funding rules to help the companies out. Then the COVID-19 pandemic in 2020 made the stock market – and pension assets – plummet. Regulators rushed to help out the pension-plan sponsors even more, with programs such as short-term solvency-funding holidays.

Veritas notes most Canadian companies operate pensions that are regulated by the federal government, Ontario, Quebec, the United States or Britain. And in nearly every jurisdiction, the funding rules have been getting easier. Ontario dropped the threshold for what is considered a well-funded plan. Quebec switched the measurement standard to a more generous method. The U.S. increased the number of years a company was allowed to get its plan up to full funding.

All of this, just in time for the rapid and, depending on who you ask, unexpected rise in interest rates in recent months. This is how powerful the interest rate benefit is: Veritas estimates a change of 0.25 of a percentage point in the discount rate used by a large Canadian corporation has an impact 10 to 14 times larger than a 0.25 percentage-point change in investment return.

To make its forecasts, Veritas did granular analysis on a subset of 12 S&P/TSX 60 companies that represent about 60 per cent of the pension-plan obligations of companies in the index. Some of the individual estimates are striking: Veritas says a 0.25 percentage-point decrease in interest rates can add $806-million to pension funding at BCE Inc. and $515-million at Canadian National Railway Co. The benefit to Canadian Pacific Railway Ltd., Imperial Oil Ltd. and Bank of Nova Scotia exceeds $400-million for each. Air Canada, which is not in the index but operates a huge pension plan, gets a $748-million benefit for each quarter-point rate-rise, Veritas says.

That swings some underfunded plans to the positive side of the ledger, and allow some plans where funds were at break-even to go into large surpluses. Veritas estimates that Suncor Energy Inc.’s plan, which was $602-million in deficit at the end of 2021, will be in surplus by $502-million by the end of 2022. Bombardier Inc. (also not in the S&P/TSX 60) could swing from a $646-million deficit to a small surplus. Power Corp. of Canada will go from a $24-million surplus to a $1.23-billion one, Veritas estimates. BCE Inc., with just under $3-billion in surplus in 2021, could be $6-billion in the black at the end of this year.

Pension-plan sponsors with a surplus no longer need to write those huge catch-up cheques; indeed, they were already declining at many companies, Veritas found. And in many jurisdictions they might be able to take a contribution holiday, allowed to skip putting in the amount equal to what their employees earned for their service in the past year. The effect will be continuing: Because of regulatory differences and various ways of calculating funding, the decline in cash contributions may accelerate over the next two to three years, Veritas thinks.

There are many caveats to this analysis. Financial accounting for pensions differs from regulatory measures of pension funding, and there’s little to no required disclosure of the latter for publicly traded companies. Indeed, Veritas warns that its estimates, particularly for specific companies, are “rough” and may differ materially from the final numbers.

However, there’s little question about the direction of funding and cash contributions, and the regulatory framework that’s helped so much. Michael Powell, president of a group called the Canadian Federation of Pensioners, has been on a quest to improve the laws for the people who receive the pension payments, as opposed to the companies that have had such trouble funding them. His group is currently calling for prioritizing full protection for defined benefit pensioners in the event of a company’s insolvency.

He says the current improved pension funding should be viewed as an opportunity to bring back previous funding requirements on companies “and provide pensioners the security they have earned.”

“During the pandemic governments across Canada were concerned that there would be a liquidity crisis,” he writes to me in an e-mail. “Was there really a liquidity crisis?”

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