Defined-benefit pensions are, for the most part, no longer among the perks that big companies offer to new hires. But for some corporations, that prudent move may have come too late. As investors start moving their funds back into equities, many of the firms gaining from the so-called "Great Rotation" are being dragged down by the pensions they've already committed to paying, and the current low-yield environment has left them raiding their revenue to keep plans solvent. Shareholders banking on a rebound in corporate earnings – and central banks hoping for renewed investment in machinery and equipment to boost GDP growth – should brace themselves for a less robust environment than stock markets appear to be signalling.
A report in The Wall Street Journal Monday noted that Ford Motor Co. will spend $5-billion (U.S.) topping up pension funds this year, and companies such as Verizon and GM have traded all or part of their pension obligations to Prudential Insurance Co in exchange for agreeing to purchase annuities.
Canadian companies are in similarly dire positions: Reuters noted last year that Air Canada's pension deficit at the start of 2012 was estimated to be $4.4-billion (Canadian); BCE topped up its defined-benefit plan in December of 2012 by $750-million, reducing its projected cash flow for the year to between $1.6-billion and $1.75-billion. BCE's annual report states that it assumes the plan's assets will deliver a 7-per-cent annual return, an expectation once thought to be sensible (if not downright conservative), but which since the crisis has inspired skepticism.
The U.S. Federal Reserve's most recent FOMC minutes hinted that QE3 may come to an end as early as this summer, which would allow interest rates to rise again, and with them, the returns on many bond funds' holdings. While that will eventually help close the gap for pension plans, in the medium term companies will still be forced to combat pension shortfalls just as baby boomers begin retiring in ever-increasing waves. Such shortfalls will siphon off flows from corporate cash hoards, reducing the funds available for purchase of equipment and machinery, which in turn will hit companies that benefit from such investment – like ArcelorMittal Dofasco and U.S. Steel Canada, whose pension plans are short $500-million and $1.6-billion, respectively – and so on down the line.
Bank Of Canada senior deputy governor Tiff Macklem estimated in a recent speech that Canadian exports are $123-billion behind where they would be in a normal post-recession recovery, and that companies should invest further in equipment to become more competitive.
Last August, when Air Canada, Canada Post and others asked Finance Minister Jim Flaherty for more time to pay down pension shortfalls, they were rebuffed. If Mr. Flaherty and Mr. Macklem want to see more than a ripple of activity from Canadian corporations, they should reconsider.