Increased Pension Liabilities During The Coming Market Crash

Many Canadian companies have significant unfunded pension liabilities on their balance sheets. With the traditional 60/40 allocation to stocks and bonds, pension deficits may become unmanageable during the next market correction if they are not dealt with urgently. Governments can afford to ignore this looming disaster and act irresponsibly largely because they can print money; however, corporations cannot afford the risk of unfunded liabilities nor can they eliminate pension deficits as easily. We would like to take this opportunity to illustrate how these pension deficits can be taken in hand.

President Barack Obama’s administration racked up nearly as much debt in eight years as in the entire 232-year history of the US before he took office. He entered office with $10.7 trillion in total debt, and he bowed out with the country owing $19.9 trillion. That’s an average tab of $1.15 trillion a year.

Under President Donald Trump, the debt has continued to climb. The $2.18 trillion increase works out to about $1.05 trillion a year, or slightly less than the pace Obama set.

While the magnitude of direct debt is a formidable problem, unfunded liabilities are a much bigger predicament—promises that the government has made that need to be paid in the future. As of 2019, total unfunded liabilities in the US, consisting of Social Security and Medicare liabilities, amount to $122 trillion. To put this into perspective, it works out to over $380,000 per US citizen. This hidden liability brings the total debt-to-GDP ratio to 120.15%.[1]

Compared to the US, Canada’s total household debt seems much smaller at $1.8 trillion, plus unfunded liabilities for Canada Pension Plan, Old Age Security and Medicare adding another $2.2 trillion, for a total of $4 trillion. This is only slightly less, proportionately than the US, but it still equates to $243,000 per citizen or 97% of GDP.

The biggest problem hidden under the surface is unfunded pension liabilities in private and government pension funds. In Canada, total pension assets are $1.63 trillion. According to Bloomberg, 103 companies listed on the TSX have unfunded liabilities of $15 billion. While many companies have switched to defined contribution plans for new employees, there are still many grandfathered defined benefits plans for past employees. These liabilities are part of corporate liabilities on the balance sheet, and they have a negative impact on the company’s share price. While the large pension funds that have in-house portfolio managers also own real estate and infrastructure, the smaller pension funds only hold the traditional 60/40 portfolio of stocks and bonds. According to Willis Towers Watson, a global advisory, broking, and solutions company, the average return for global pension funds in 2018 with a 60/40 allocation was
-5.7% and this disappointing performance was during the longest bull market in history. Over the past ten years, it averaged 4.46%[2]; however, even these returns were below the target benchmark, resulting in growing pension liabilities. Adding to pension shortfalls is increased longevity, reduced birthrate and the increase in retirement in the largest sector of the population. When pension funds were initially set up in the 1950s, there were 16 working employees per retiree. In 2030, however, after the last baby boomer turns 65, there will be only about 2.3 workers per beneficiary.

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