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Most Pension Plans in the Red, Study Says By:
Ian Karleff
Pension plans
at two-thirds of Canada's blue-chip firms are deep in the red following a
dismal year that shattered the return expectations of most actuaries,
according to a Bay Street report released yesterday. The latest
Accountability report from Caldwell Securities looked at 46 Canadian firms
and shows only eight generated positive returns in the year ended March
31, and only two firms had returns above expectations. The biggest losses
were recorded at Alcan Inc., Nortel Networks Ltd., Bombardier Inc. and
Canadian Imperial Bank of Commerce -- all of which saw losses in the
hundreds of millions of dollars. The losses
call into question the companies' expected return estimates of 7% to 10%,
and suggest estimates should be ratcheted down to the 6%-to-8% rate that
fund managers say is a reasonable, average rate of return over five years. Legendary
value investor Warren Buffett recently cut pension assumptions to 6.5% for
several companies owned by Berkshire Hathaway Inc. -- a move that would
carve billions of dollars from Canadian corporate profits if implemented
by all of this country's large-cap stocks. The report
follows on a warning from National Bank of Canada strategist Martin
Roberge this year that Canadian firms will face a funding gap of
"alarming proportions" if they continue to use unrealistic
return expectations. However, projections will likely not be revised for
another year or two because of three-year actuarial valuation cycles. The
worst-funded pension in the study was at Magna International Inc., with
only 25% of total obligations covered by assets. Bombardier, with only 68%
of current obligations covered by assets, topped the underfunded list to
the tune of $1.6-billion. Canadian
retailers were among the most overfunded, with assets at Hudson's Bay Co.
covering 146% of obligations for $426-million in excess funds, and Sears
Canada looking at a surplus of $271-million, despite returns in the year
to March 31 falling significantly short of expectations. And while
overfunded pensions appear to be a positive, they can serve to bloat and
inflate income, thereby making year-over-year income comparisons
meaningless. In fact, the
report concludes that loose Canadian pension rules and tolerant,
investor-unfriendly auditors make year-over-year earnings' comparisons
inaccurate and meaningless. "The sad part is that Canadian accounting
is full of pension-like sloppy rules, and golden opportunities to play
with the numbers. Having an auditor attest that the loose rules were
followed adds nothing to help investors," wrote the study's authors
Mark and Al Rosen of Rosen & Associates. Al Rosen, who
is currently in the public eye for his controversial audits of school
boards in Ontario, said that accounting rules have yet to be tightened in
the aftermath of "Enron and the clones." Employees of
energy trader Enron Corp. lost at least US$1-billion from their retirement
plans when the company went bankrupt after management concocted a
still-under dissection confidence scheme. "Canada
has done virtually nothing worthwhile this year to force independent rule
setting, and to have serious enforcement," wrote Mr. Rosen and his
son Mark. Meantime, BCE
Inc., EnCana, Sun-Life Financial, Telus Corp. and the aforementioned
retailers all show pension surpluses, and were among 10 other firms in the
study that used these gains to offset expenses and increase operating
income. BCE's pension
plan augmented earnings to the tune of $275-million, while Telus saw a
benefit of $54-million and Hudson's Bay $17-million, the report said. "Is it
possible that many Canadian companies have generated NO real earnings in
the past 10 years.? It seems so," wrote Mr. Rosen. FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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