Canadian companies could solve their big pension deficits by forgoing buybacks, dividends

Some of Canada’s biggest companies have let considerable deficits in their pension plans linger while pumping billions of dollars into dividends and stock buybacks, according to one think-tank. 

The Canadian Centre for Policy Alternatives on Thursday released a report that found S&P/TSX Composite Index companies with defined-benefit pension plans bought back $16-billion worth of shares and paid out $50 billion in dividends in 2017.

Taken together, the money given to shareholders was five times the value of their combined $12-billion pension shortfall, which was “heavily concentrated” in just a few companies, the CCPA report said.

Out of the 90 or so companies on the index that have defined-benefit pensions, the CCPA report said two-thirds in any given year paid out more to shareholders than it would cost them to shore up their pension deficits.

“Companies are paying out substantially more to shareholders than would be required in most cases to completely eliminate their pension deficits, and the elimination of those deficits would be a one-time payment, whereas the payments to shareholders continue year after year,” said David Macdonald, senior economist at the CCPA and one of the report’s authors.

For example, the CCPA found that in 2011 the companies repurchased $8 billion in stock and paid out $32 billion in dividends despite having a $19-billion funding shortfall.

Companies are allowed to have underfunded pension plans as long as they meet minimum funding obligations set by the government.

The CCPA’s findings report comes as the purpose of a company is being debated again. Earlier this month, Business Roundtable, a prominent lobby group for the CEOs of major U.S. companies, issued a statement that committed to going beyond the devotion to the principles of “shareholder primacy” and to deliver value to customers and invest in employees, among other things.

The Financial Post alsorecently reportedon the growing amount of stock that Canadian companies are buying back, a trend that has faced pushback in the U.S. over concerns it may increase inequality and divert money away from investment or wages. 

There are also concerns for taxpayers. The CCPA report notes that Ontario, for example, has a Pension Benefit Guarantee Fund that could be left “on the hook” for insolvent plans.

The report found that overall pension funding ratios among the companies studied — which control 88 per cent of defined-benefit plan assets by value in Canada, it said — have improved since 2011. 

“Still, pension funding ratios are more or less flat since 2013 while payments to shareholders have increased, which seriously undercuts corporate complaints about risk,” the report said.

The CCPA wants governments to take into account the financial position of a plan sponsor, not just the plan when examining pensions, or to restrict dividends and buybacks if a plan’s funding dips below a certain level.

It also said the best way to ensure secure retirements would be to beef up the Canada Pension Plan, Old Age Security and the Guaranteed Income Supplement.

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