Think-tank wants new rules for shareholder payments to address pension deficits

A report from the Canadian Centre for Policy Alternatives is touting restrictions on shareholder payments as a way of boosting the sustainability of defined benefit pension plans.

The report, which looked at 39 companies on the S&P/TSX 60 index with defined benefit plans, found that in many cases, shareholder payouts exceed pension deficits. “For the case of the 39 companies out of the S&P/TSX 60 that have DB plans, nine are fully funded; another 25 could make their plans fully funded with less than a year’s worth of shareholder payouts. So the vast majority, in essence, of companies could rapidly repay those deficits out of shareholder payouts,” says David Macdonald, senior economist at the think-tank.

“And there’s really only two companies that couldn’t rapidly pay off those deficits. One is Bombardier, which hopefully in the future will have better luck, and the other one is Eldorado Gold, [which] didn’t have dividend repayments in 2016.”

Read: FTSE 100 pensions could clear deficits by withholding dividends: report

While the 39 companies had combined deficits of $10.8 billion in their pension plans last year, the report noted they had increased payouts to shareholders by $15 billion between 2011 and 2016.

With those numbers in mind, the report made three recommendations, including mandatory disclosure of certain dividend payments and a requirement that sponsors whose pension plans are “severely underfunded” would need to gain permission from regulators to make payouts to shareholders.

“I think the bare minimum that is required is mandatory disclosure to the regulator, as is the case in the U.S.,” says MacDonald, referring to rules that require companies to disclose to the regulator that they’re paying extraordinary dividends or are offering to buy back shares.

The report also recommends raising Ontario pension benefits guarantee fund premiums for companies that fail to close the funding gaps in their pension plans.

Read: U.K. pension deficits double

Macdonald also suggests linking the time period for eliminating a pension deficit to shareholder payments. “I think it makes sense to look at shareholder repayments as a measure of capacity of how quickly those deficits could be made up and to push companies to make them up more rapidly if they have the capacity.”

Macdonald argues companies could make up their deficits if they chose to prioritize their pension plans ahead of shareholder payments.

“They’re choosing to allocate their resources toward shareholder repayment and not to eliminating deficits. Which isn’t to say they’re not meeting the regulatory requirements. They are, but I think what that speaks to is the fact that despite the fact that you’ve got this increased flexibility in terms of repayment, say in Ontario, for instance, over the last several years, for many companies, [it wasn’t] necessary. So I think it makes sense to have the regulator have the capacity to examine shareholder repayments as one of the ways of deciding or negotiating with a company how quickly they should make up deficits once those deficits appear in their DB plans,” he says, adding the hope is to avoid the situation faced by Sears Canada Inc., which the report notes has a $267-million deficit in its defined benefit pension plan even as it has paid out $1.5 billion to shareholders since 2010.

Read: Lawyer asserts priority claim for Sears retirees in CCAA proceedings