We’ve all got that friend who says they can’t pay you back for dinner, but when you show up at their house you discover they just bought a brand new big-screen TV.
Now imagine that dinner cost you $12 billion, and that new TV was worth $66 billion. You might be a little frustrated.
A new study released Thursday suggests that’s exactly what’s going on with a major chunk of private-industry pensions across Canada. The study, by the Canadian Centre for Policy Alternatives, found that of the 90 companies listed on the TSX Composite Index that have defined-benefit pension plans, just a handful completely funded their workers’ pension funds in 2017. At the same time, they were busy paying out billions of dollars in dividends to shareholders.
“I’m not against companies paying dividends. But if they can afford to pay the shareholders, they can afford to fund the pensions,” said report co-author David McDonald, senior economist at the CCPA.
The study found that in 2017, the 90 defined pensions were collectively underfunded by roughly $12 billion. The companies responsible for those pensions, meanwhile, paid out $66 billion in dividends to shareholders — more than five times the amount it would have cost to fund the pensions.
Those shareholders usually include the very senior executives and board members who decide how free cash is used.
The biggest single reason pension-funding deficits aren’t been cleaned up, argues McDonald, is that the companies don’t have to. Pension regulations dictate that funds must have at least 85 per cent of the money required to meet all their obligations, in the event that the plan is wound up. Regulators don’t look at whether the company’s been paying out dividends or hefty executive bonuses.
“All they need to do is look at whether they meet the statutory minimum. That needs to change. It’s pretty clear that without regulatory changes, those deficits are going to be there forever,” said McDonald. “Shareholders are supposed to take on the firm’s risk. Instead, that risk is being shouldered by workers whose retirement security is compromised by outstanding pension deficits.”
Retired Sears employee Ken Eady, who worked at the now-bankrupt retail powerhouse for three decades, agreed that regulators should be able to take a broader approach.
“I think (the regulators) should be looking at the financial health of the company. The dividends. Executive bonuses. Those are all things that should matter,” said Eady, who’s now a vice-president of Sears Canada Retirees Group, an association of company pensioners.
Sears pensioners sued after their pensions were cut, saying that the company shouldn’t have paid a $509-million dividend to shareholders in 2013. At the time that dividend was paid, the pension fund at Sears Canada was short by $133 million.
While Eady says he and his wife have been able to survive on a pension that only pays about 80 per cent of what it was supposed to, other former colleagues haven’t been so fortunate.
“For me and my wife, we’re OK. For some people, particularly outside of Ontario, it’s been really tough. It’s not the ability to take vacations to Florida. It’s the difference between being able to stay in your own apartment or having to move in with your kids,” said Eady.
But pension expert Malcolm Hamilton says occasional underfunding is a side effect of the way defined benefit pensions usually work — contributions from workers and companies which are then put into investments like stocks and bonds. When markets take a tumble, as they did after the global financial crisis in 2008, pensions will look underfunded. But that’s only a problem, says Hamilton, if the company itself is actually in financial trouble. Otherwise, the company and its workers will keep paying in, and there will be plenty of money for pensioners to collect.
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“From time to time, the investments are going to perform badly,” said Hamilton, a pension industry consultant and former actuary at human resources consulting giant Mercer.
“As long as the company’s in good financial shape, that’s what matters more. 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.”