Postmedia Network Inc. is asking current and former employees to help the embattled newspaper publisher save some millions of dollars a year by extending the amount of time the company has to top up their pension fund.
The company – which publishes such metropolitan titles such as the National Post, Ottawa Citizen and Calgary Herald – is taking advantage of rules that were quietly implemented Nov. 1 in Ontario that allow companies incorporated in the province to fully fund their pension shortfalls in 10 years rather than five.
The changes are intended to help stave off a national pension crisis. A survey by consultant group AON PLC found 97 per cent of defined-benefit pension plans in Canada have solvency deficits. The average plan would be able to pay only 70 cents on the dollar if it were forced to meet all its obligations today.
While some companies – most notably Air Canada – have received funding exemptions from the federal government since the recession to help them rebuild their balance sheets, it is the first time the vast majority of Canada's largest companies have been able to push their obligations into the future. This is significant because they are asking their employees to gamble on the future health of the company, and put their retirement savings on the line.
"Companies want to pay the minimum now and worry about the rest later," said Mitch Frazer, a partner at Torys LLP that specializes in pensions.
"They'd much rather put money in when times are good and hope for better interest rates down the road."
Postmedia is essentially doing what some homeowners have done to make their monthly payments more affordable – longer amortization periods mean lower payments while their funds recover from the anemic returns earned since the recession thanks to low interest rates and choppy stock markets.
The publisher has been struggling to contain costs amid mounting losses – in its last quarter it posted a $28-million loss. A recent three-year plan calls for savings of $120-million over the next three years to make up for advertising shortfalls, and chief executive officer Paul Godfrey has vowed to scour the balance sheet for any opportunity to enhance the company's finances. It has laid off workers, reduced the number of publishing days at some papers and announced plans to put up paywalls around its newspaper websites.
While it has about $355-million set aside in its pension plan, the company needs another $32-million to meet its obligations. Increasing the amortization period to 10 years will reduce its annual payments by about $3.2-million.The company hopes higher interest rates help the fund grow out of its shortfall and reduce the amount of money it needs to contribute by the time the full amount comes due.
Many companies are also switching to defined contribution plans for their employees, which do not come with guaranteed payouts but instead fluctuate with the markets and shift the responsibility from the employer to the employee. The pension plan at Postmedia doesn't cover all of its employees – it includes head office workers, its national advertising sales force and some workers at the Ottawa Citizen, Montreal Gazette, Calgary Herald and Edmonton Journal.
Companies are allowed to run deficits in their defined benefit pension funds, but they need to ensure they are brought back up to 100 per cent within five years. If Postmedia were forced to pay everything it has promised its current and future pensioners – a largely hypothetical situation that would mean the company has closed or gone bankrupt – it would only be able to pay them 72 cents on the dollar.
"While there is no direct impact on member benefit levels as a result of this funding relief, the relief measures allow Postmedia to pay the plan's deficit over a longer period of time," director of total rewards Lu Traikovich-Gonsalves wrote in a letter to pensioners. "It will take longer to achieve full security of pension benefits if the plan was terminated prior to full funding being achieved."
Companies aren't allowed to impose the changes on plan members. If more than a third of affected employees object to a letter of intent from the company, it must shelve the idea.
"This is a calculated risk they are being asked to take," Mr. Frazer said. "If a company goes under, then someone is likely to have their pension slashed .You generally want a company to survive, because that's in everyone's best interest. But if you're wrong or don't have faith in management and things don't work then there is a greater shortfall."