David Macdonald of the Canadian Centre for Policy Alternatives explains how firms are putting shareholders ahead of workers in most cases
The Sears Canada bankruptcy and treatment of its workers and retirees has become a hot-button issue across the country. Calls are mounting for the federal government to introduce legislation to better protect employees in the event of a company going bust.
It’s a move long overdue, according to Canadian Centre for Policy Alternatives (CCPA) senior economist David Macdonald. Having recently authored the report – The Lion’s Share: Pension deficits and shareholder payments among Canada’s largest companies, Macdonald believes there a number of positive steps lawmakers can take to address this problem.
“Sears is definitely a cautionary tale, but it’s not unusual for corporate Canada,” he says. “It’s not unusual to have underfunded defined benefit (DB) plans and to pay factors of a magnitude more in shareholder repayments. That’s a common position for Canadian companies with DB plans.”
In Macdonald’s view, regulators simply have no teeth when it comes to enforcing a company’s pension obligations. There are examples of firms suspending payments to shareholders in an attempt to reduce pension shortfalls, such as Air Canada in 2013, but these cases are in the minority.
“Longer term, we need the regulator to have the ability to take into account shareholder payments as a measure of the capacity of a company to pay back its deficit,” says Macdonald. “At present, all companies are treated equally in terms of a repayment schedule.”
It means Canadian companies in the Fortune 500 providing generous dividends each quarter can still operate with large pension deficits. At the opposite end of the spectrum are struggling entities, Sears Canada being the most high-profile recent example, which ran a $267 million pension shortfall, but still paid out $1.5 billion in dividends and share buybacks since 2010.
“It is carte blanche applied to everyone, whether you are Bombardier that pays very little to shareholders, or one of the big banks that maintain a pension deficit but are highly profitable and pay a lot back to shareholders,” says Macdonald.
The CCPA paper reveals that close to two thirds of S&P TSX companies with DB plans have underfunded pensions. While these firms are profitable, it’s not that much of a concern, but if the tables turn it’s a different story entirely.
“It’s an ongoing story every five to ten years where you have a big Canadian employer that seemed unassailable and is allowed to run up a big pension deficit,” he says. “They could have made up that deficit many times over, as was the case with Sears and Nortel, but decided not to.”
For workers in Ontario, the Ontario Pension Benefits Guarantee Fund guarantees private sector pensions up to $1,000 per month, which will soon rise to $1,500. For companies that underfund pension plans, increasing the likelihood of insurance ever being needed, there should be ramifications, believes Macdonald.
“One of the things that could be included in premium calculations is shareholder repayments,” he says. “If you want to pay out to shareholders instead of reducing your DB deficit, the maybe you should be paying a higher premium to the PBGF (Pension Benefits Guarantee Fund).”
Related stories:
Retirees group calls for pension protection across Canada
Trudeau responds as workers' anger grows over Sears Canada bankruptcy
It’s a move long overdue, according to Canadian Centre for Policy Alternatives (CCPA) senior economist David Macdonald. Having recently authored the report – The Lion’s Share: Pension deficits and shareholder payments among Canada’s largest companies, Macdonald believes there a number of positive steps lawmakers can take to address this problem.
“Sears is definitely a cautionary tale, but it’s not unusual for corporate Canada,” he says. “It’s not unusual to have underfunded defined benefit (DB) plans and to pay factors of a magnitude more in shareholder repayments. That’s a common position for Canadian companies with DB plans.”
In Macdonald’s view, regulators simply have no teeth when it comes to enforcing a company’s pension obligations. There are examples of firms suspending payments to shareholders in an attempt to reduce pension shortfalls, such as Air Canada in 2013, but these cases are in the minority.
“Longer term, we need the regulator to have the ability to take into account shareholder payments as a measure of the capacity of a company to pay back its deficit,” says Macdonald. “At present, all companies are treated equally in terms of a repayment schedule.”
It means Canadian companies in the Fortune 500 providing generous dividends each quarter can still operate with large pension deficits. At the opposite end of the spectrum are struggling entities, Sears Canada being the most high-profile recent example, which ran a $267 million pension shortfall, but still paid out $1.5 billion in dividends and share buybacks since 2010.
“It is carte blanche applied to everyone, whether you are Bombardier that pays very little to shareholders, or one of the big banks that maintain a pension deficit but are highly profitable and pay a lot back to shareholders,” says Macdonald.
The CCPA paper reveals that close to two thirds of S&P TSX companies with DB plans have underfunded pensions. While these firms are profitable, it’s not that much of a concern, but if the tables turn it’s a different story entirely.
“It’s an ongoing story every five to ten years where you have a big Canadian employer that seemed unassailable and is allowed to run up a big pension deficit,” he says. “They could have made up that deficit many times over, as was the case with Sears and Nortel, but decided not to.”
For workers in Ontario, the Ontario Pension Benefits Guarantee Fund guarantees private sector pensions up to $1,000 per month, which will soon rise to $1,500. For companies that underfund pension plans, increasing the likelihood of insurance ever being needed, there should be ramifications, believes Macdonald.
“One of the things that could be included in premium calculations is shareholder repayments,” he says. “If you want to pay out to shareholders instead of reducing your DB deficit, the maybe you should be paying a higher premium to the PBGF (Pension Benefits Guarantee Fund).”
Related stories:
Retirees group calls for pension protection across Canada
Trudeau responds as workers' anger grows over Sears Canada bankruptcy
