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  2. DEFINED BENEFIT
December 26, 2016 12:00 AM

Challenges of being an ongoing concern

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    The Canada Post pension plan is seeking permanent funding relief, although it doesn't characterize it that way.

    It is seeking to move to funding calculated on an ongoing-concern basis rather than a solvency basis, the current method it uses.

    Such a change is unacceptable.

    Canada Post's business does not now generate enough earnings to make pension contributions sufficient to match its obligations. Its status as an ongoing concern faces not just operational cost but also competitive challenges in the digital age.

    Changing the funding calculation method in such a way would transform what is estimated to be a C$8.1 billion ($6.1 billion) pension deficit into a C$1.2 billion pension surplus, according a September report by a Canada Post task force. As of last Dec. 31, the plan had an estimated C$22 billion in assets and C$28 billion in liabilities. But since then, the funding gap has grown, the report noted.

    The move would lower contributions from those required on a solvency basis, or termination basis, essentially based on market value. But Canada Post's sustainability as an ongoing concern, with enough revenues to support its defined benefit plan, faces uncertainty. The report lays out an action plan “to strengthen (the Canada Post) business and address the structural pension challenges in order to be able to fulfill the funding requirements of the plan.”

    But transforming the postal business cannot bolster revenue as easily as policymakers can change a pension deficit into a surplus. As the report states, “on average, Canada Post has generated a nil income or loss over the last five years.”

    In addition to the proposed change in funding calculation, another proposal would incorporate the plan into the C$84.7 billion Public Service Pension Plan, Ottawa, a move that makes sense and should be adopted. That would allow the plan to take advantage of greater scale to gain access to more sophisticated investment exposures and better expected investment performance as well as reduce investment and administrative costs. But those advantage won't do much to lower the deficit.

    Because the defined benefit plan has become unaffordable, Canada Post should stop future accruals for existing participants, moving them and new employees into a defined contribution plan. That would help stem the growth of liabilities but wouldn't solve the current underfunding.

    In the absence of a switch to a DC plan, changing the funding calculation will only create a false sense that the issue has been resolved by showing a surplus as an ongoing concern. With an apparent surplus reported using the ongoing-basis calculation, there would be no pressure for the plan to fund the deficit. But the surplus is an artificial product of a change in actuarial method.

    The change merely postpones a reckoning as the surplus is eventually exposed as not real and there is still a need for enough assets to cover benefits in the long term. Canada Post and the government need to address fully funding the plan on an economic realistic basis, not a contrived one.

    Related Articles
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    New rural Canada Post employees to be moved to DC plan
    Canada Post task force outlines several options for reducing pension plan burden
    Canadian pension funds post 4.2% gain in third quarter
    Canada Post DB plan should get solvency funding exemption — report
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    October 23, 2023 page one

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