Company Pension Risk – The Perfect Storm

Last year, I touched on the shortfall that corporate and government pensions had in terms of funding future liabilities. National Bank came out with a report on February 10th updating the current situation on corporate plans that I wanted to share with you.

Between market declines in 2008 and lower interest rates creating a higher present value requirement to meet retiree pension payments, the average corporate pension plan in Canada is underfunded by 40%.

Using a 7.5% rate of return, it will take 12 years to bring these plans back to being fully funded. In the past government regulators have allowed companies to take up to 10 years to fund shortfalls and this will probably continue. That being said, pressure on cash flow and dividends for these companies is around the corner, just as revenues and earnings decline substantially.

Companies that have large pension plans relative to their size include CN, CP, Bombardier, Bank of Montreal, Laurentian Bank, CanWest, Quebecor World, Quebecor Inc,  Torstar, and all of the telcos.

Having a large plan doesn’ necessarily mean that they are underfunded as CN, BMO, and Laurentian Bank were all at or near accounting surpluses at the end of 2007.

Looking at companies that appear to have very large pension obligations and pretty large deficits include Bombardier and Air Canada with Air Canada showing a $403 million pension deficit and Bombardier coming at over $1 billion US.

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