Controlling the impact of pension expense on corporate finance

While pension plans in Canada have become better at managing their assets in conjunction with liabilities, many plan sponsors still struggle with assessing how the pension plan affects the company’s overall finances, its balance sheet, debt, cash flow and structure.

“The pension plan is affecting the company in a very profound way,” said Andrew Kitchen, managing director for the solutions and strategies team at SEI Institutional Group, during Benefits Canada’s 2015 DB Investment Forum on Nov. 11 in Toronto.

Even though the pension promises offered by employers aren’t core to the business and can be a financial drain on the balance sheet, “we are stuck with them,” said Kitchen.

“We’ve got to try and move our way through the quagmire that has been produced by these pension promises.”

Many companies are addressing some of those challenges at a plan level. Pension plan sponsors are matching assets to liabilities and using asset liability studies as plan design and sustainability becoming part of the culture. What needs to happen, said Kitchen, is more informed decisions in some cases by moving those questions up to the corporate finance level. “It’s not revolution but evolution,” he said.

Modelling should occur not only at the plan asset and liability levels but also all the way through the company’s financial statements. It’s a more holistic decision-making process that integrates the pension plan more contextually with the corporate base. As a result, companies with more capital constraints might look at their plan with greater liability matching and risk aversion.

The issue then becomes a matter of total enterprise integration that goes beyond just the needs of the plan to consider the company as well. “You have to choose your pension philosophy. Are you a cost manager or are you a liability hedger?” said Kitchen.

All the articles from the event can be found in our special section: 2015 DB Investment Forum coverage.