Canadian Pension Shortfalls Up in 2002

The recent study in the online Ivey Business Journal represents a dramatic turnaround.   As recently as 2000, 77% of Canadian pension plans in the same sample were overfunded.   By 2001, that number had fallen to 42%. Looking toward 2002’s numbers, the study predicts only 17% to 22% of plans will be overfunded, according to a Toronto Globe report.

Depending on how badly the pension funds did collectively last year, the study predicts their total deficit could range from CDN $17.8 billion to CDN $23.5 billion. The low end of this estimate still represents a huge jump from the CDN $1.8 billion total shortfall the same 100 plans experienced in 2001 and the CDN $20.6 billion surplus they had in 2000, the study stated.

Much Like US

The underfunding could have far reaching effects, with the potential to affect the borrowing costs, cash flow and earnings at the most severely hit firms.   However, Canadian pension accounting standards will allow most firms to keep the majority of this debt off their balance sheets, at least in the short term, according to the report.  

The study points to 2001’s results for evidence.   While the 100 plans had a funding deficit of CDN $1.8 billion that year, they showed assets of CDN $6.7 billion on their balance sheets, because of the accounting rules.

Christine Wiedman, an accounting professor at the University of Western Ontario and one of the authors of the study, said debt rating agencies will certainly be watching the off-balance-sheet numbers, and expects the most immediate effect of the rising pension shortfall will be cuts in credit ratings at some firms and higher costs for borrowing.

The action by the rating agencies may be similar to that of their US counterparts, dealing with a maelstrom of pension funding problems (See  America’s Pension Crisis ). Some major US companies, such as auto makers General Motors Corp and Ford Motor Co recently saw their credit ratings pressured due in part to concerns about their pension plans (See  Fitch: Auto Sector Pension Gap $30B Plus by YE 2002 ).

Additionally, much like the United States (See  Rising Pension Expense Heightens Interest in Design Change ), Wiedman says she anticipates shortfalls in pension funding to reduce cash flow at some companies that are required by regulators to increase contributions to their pension plans.   Depending on the level of the funding shortfall, earnings also could be affected as some companies bring a portion of this debt onto their balance sheet, she said.

Wiedman went on to say companies in mature industries with a large retired workforce, such as the steel industry, would likely feel the greatest pressure.

Methodology

For the study, Wiedman and her fellow researchers, looked at the funded status of Canada’s 100 largest pension funds using data contained in the footnotes of 2001’s financial statements, the most current information available.   With that data and certain basic assumptions about the plans’ asset allocation, the team projected how each of those pensions would fare, assuming an average loss of 4%, 6% and 8% in 2002. The three scenarios gave them a range of possible outcomes, from optimistic to pessimistic.

To arrive at the funded status forecast for the 100 companies, the researchers relied on general assumptions about plan obligations.