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Most Pension Plans in the Red, Study Says

 

By: Ian Karleff
National Post, August 22, 2002

 

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.


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