Company pension plans short-changed in favour of shareholders, finds study

by Leo Almazora04 Sep 2019

Canadian workers who rely on company pensions for retirement income suffer when their company’s defined-benefit plans are underfunded. And according to a new report, their hardship may be coming as a result of companies favouring one other stakeholder group.

In a study of 90 companies listed on the TSX Composite Index that have defined-benefit pension plans, the Canadian Centre for Policy Alternatives (CCPA) found that only a handful completely funded their workers’ pension funds in 2017 — the same year that those 90 companies paid out billions of dollars in shareholder dividends.

According to the CCPA, the 90 defined pensions experienced a collective funding shortfall of roughly $12 billion in 2017. Meanwhile, the shareholders of the companies responsible for those pensions — which usually include senior executives and board members with a say on how free cash is used — received $66 billion in dividend payments.

“I’m not against companies paying dividends. But if they can afford to pay the shareholders, they can afford to fund the pensions,” David McDonald, senior economist at the CCPA and co-author of the report, told the Toronto Star.

The problem, argued McDonald, lies in the statutory minimums dictated by pension regulations. Companies are required to have enough money in the funds to meet at least 85% of all their obligations in the event that the plan is wound up. Regulators keep an eye on those levels, but do not check whether those companies have paid out dividends or sizeable executive bonuses in the meantime.

“Shareholders are supposed to take on the firm’s risk,” he said. “Instead, that risk is being shouldered by workers whose retirement security is compromised by outstanding pension deficits.”

The sentiment was echoed by Ken Eady, a retired Sears employee who now acts as a vice president of Sears Canada Retirees Group, an association of company pensioners. The pensioners sued the company after their pensions were cut; Sears Canada paid a $509-million dividend to shareholders in 2013, while its pension fund was short by $133 million.

“I think (the regulators) should be looking at the financial health of the company,” Eady said. “The dividends. Executive bonuses. Those are all things that should matter.”

According to Malcolm Hamilton, a pension industry consultant and former actuary at Mercer, underfunding should be expected occasionally, particularly when defined-benefit pension funds take a hit from financial-market tumbles. But he clarified that it should only pose a problem for companies that are actually in financial trouble.

“As long as the company’s in good financial shape, that’s what matters more,” he told the Star. “I’d rather have something that’s 85 per cent funded by a strong, financially healthy company than something that’s at 102 per cent but is with a company that’s in trouble.”