©  Copyright 2002 Rogers Media. The following article first appeared in the January 2002 edition of BENEFITS CANADA magazine.

On oct. 31, the u.s. treasury department announced its decision to eliminate the 30-year Treasury bond (T-bond). The results were definitely spooky as investors scrambled to buy up existing 30-year bonds, driving the rate for them down to 4.87%.

The 30-year T-bond is also used to calculate current U.S. pension liabilities. As a result, they are expected to rise as interest rates drop and asset values continue to decline with the stock market.

FALLOUT IN CANADA
The situation south of the border raises questions for Canadian plan sponsors. Will there be a ripple effect here? If so, how significant will it be?

There's good news and bad news for Canadian pension plans. The long-term outlook is upbeat. John Gilfoyle, senior investment consultant at Watson Wyatt Worldwide in Toronto, does not believe that the U.S. Treasury Department's decision to eliminate the 30-year T-bond will have a long-lasting impact in Canada.

"At the time [that the Treasury Department stopped issuing the bond] the long-term interest rates in the U.S. dropped by roughly 50 basis points," says Gilfoyle. "Because Canadian markets are pulled by those in the U.S., Canadian interest rates dropped [as well]." They have since recovered, though.

Lawrence Kryzanowski, professor of finance at Concordia University in Montreal, agrees that the long-term effect will not be significant for Canadian pension plans. "When you invest in a longer-term bond, the term structure is generally upward-sloping, so you get a little more compensation for taking a risk," he adds.

Unfortunately, the impact of eliminating the bond could be significant over the next few years for plan sponsors at home and in the U.S., says Gilfoyle. Long yields are used to calculate pension expenses, and if the yields are much lower, the liability and expense increases.

"That means this year and potentially next year, when pension plan sponsors look at the pension expense numbers that their actuaries [provide], they are going to have a surprise," says Gilfoyle. "There's going to be a significant difference from the last couple of years." That difference will come directly off plan sponsors' accounting bottom line. The magnitude of such a loss could even impact the stock markets.

SHORT-TERM IMPACT
The other issue emerging from the U.S. decision is whether Canada will follow suit and terminate its 30-year bonds. A statement released by the U.S. Treasury Department notes that "the 30-year bond no longer maintains a position of significance in the financial markets. Its role and its liquidity have been significantly impaired by the substantial reduction of issuance that has occurred over the last decade." Attention and activity have, therefore, shifted to 10-year offerings.

Despite this assessment and the fact that Canada is one of only three countries still offering the bond, Gilfoyle doesn't see us moving in tandem with the U.S. "Thirty-year bonds are in demand so why wouldn't the government issue them? Back in the early 1980s the government was issuing bonds at 17% and the government of Ontario issued bonds at 19%. Compared to those levels, why wouldn't they be happy in the 5% [range]?"

In the end, it looks as if Canada's decision to maintain or drop the 30-year T-bond will be driven by Canadian supply and demand--not by the U.S. move. In the long run, this, too, is good news for pension funds. BC

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."