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Pension plans face $225-billion shortfall

From Saturday's Globe and Mail

Toronto — Canada's public and private pen­sion plans are facing a collective funding shortfall of $225-billion — an amount roughly equal to 20 per cent of the nation's gross domestic product — new estimates com­piled by three major benefit con­sulting firms show.

Closing that funding gap will require billions of additional dollars from plan sponsors and perhaps employees, the research warns. It puts the extra funding demands at 2 per cent of GDP annually over the next 15 years, provided there are no further gains or losses.

That demand for cash will surely put a strain on some busi­nesses, pension experts warned yesterday. Some plans may collapse quite publicly, they said, and others may see sponsoring em­ployers try to quietly exit tradi­tional defined benefit plans to contain their costs.

"Plans will be terminated. That's going to make the press," Michel St-Germain of Mercer Human Resource Consulting told a conference of pension managers yesterday. "There is going to be a loss of confidence. Regulators will be put in a tough spot."

Mr. St-Germain said companies may respond by asking employees to contribute to the deficit, by re­ducing early retirement subsidies or temporarily halting the accrual of pension benefits.

Regulators and lawmakers, he said, could respond with tighter rules on investments or more frequent valuations.

That is happening at the federal level, where this week Nick Le Pan, Superintendent of Financial Insti­tutions, announced that his agency was increasing valuations and becoming "more activist and interventionist."

The findings released at yester­day's conference are based on the client information gathered from three consulting firms — Mercer, Towers Perrin and Watson Wyatt.

The rival firms worked together to evaluate the funded status at the end of last year of plans in their sample, which they estimate represents about half of the funded Canadian pension system. The study included information from 1,040 pension plans, 94 of them in the public sector. In total they had $275-billion of assets under management.

Their research found that, in general, plans in their study were about 85 per cent funded, mean­ing that their assets cover about 85 per cent of their pension obligations. The most severe difficulties are likely to arise in firms that offer pension benefits based on average career pay or a flat rate linked to years of service. That's because companies with these plans tend to be in traditional industries with unionized work forces that usually upgrade benefits in negotiations. They also commonly offer early re­tirement subsidies.

The 359 plans in this group in the study had $23.2-billion in pen­sion assets but needed close to $20-billion more to fully fund their plans.

Steve Bonnar of Towers Perrin — who came up with the $225-billion shortfall estimate — said no matter what the sector, sponsors should be expecting to contribute "meaningful amounts" to their pension plans unless returns rebound to the levels of the late 1990s.

Ian Markham of Watson Wyatt said demand on cash to solve the funding problems of pension plans could create other difficulties by redirecting resources away from companies' core businesses.

"If a ton of money is sucked into the pension system it is going to create a crisis in another way," he warned.

If regulators demand companies pour money into pensions, he said, it could cause a crisis as com­panies struggle with less cash for development and expansion.

Malcolm Hamilton of Mercer predicted that ultimately the struggle could end with firms gradually pulling the plug on defined benefit plans. (These are plans where pension levels are guaranteed based on salary and years of service.)

Funding a secure pension obligation with risky equity invest­ments has always been a dubious concept, he argued. The flaws in the system, he said, have just been hidden in the past 20 years by eco­nomic prosperity.

Now that problems with pen­sion accounting and corporate disclosure have been revealed because of falling returns, he said, they must be corrected or defined benefit plans will become a thing of the past.

© The Globe and Mail

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