TORONTO - The uncertainty that accompanies an economic recession and stock market meltdown is extending from the work world into a time of life that many consider to be a haven of worry-free relaxation: retirement.
A series of reports released last week show many of Canada's corporate pension plans are struggling to stay afloat amid plunging stock markets that eroded a good chunk of the plans' wealth in 2008.
Defined-benefit plans, under which employees are guaranteed a reliable and steady income after retirement, are in trouble as companies are under pressure to make up huge shortfalls through higher contributions.
Meanwhile, defined contribution plans, where retirement benefits are not guaranteed by employers and are based on investment returns, face even bigger problems.
For some companies with defined benefit plans, the pension shortfall creates a vicious cycle: the financial crisis is forcing them to make millions of dollars in extra payments at a time when the economy is in recession and they don't have the money to do so.
Under current federal pension rules, plans are routinely valued by government regulators -- based on long-term interest rates and their current financial condition -- so there is enough money to pay retirement benefits to all members of the plan into the future.
If these actuarial valuations show a major shortfall, companies are required to put cash into the plan to make it sound again. Pension plan shortfalls don't affect benefits paid to current retirees, who will continue to receive their promised pensions.
But they can wreak havoc on a company's finances when promised benefits to future retirees are calculated.
An extended repayment period could make a significant difference for many companies. For example, a company that faces a $50-million shortfall in its pension plan would have to top that up under the current five year rule by paying $10 million a year. If the repayment period was extended to 15 years, the company would only have to pay $3.3 million a year, or 67 per cent less.
Bryan Hocking, CEO of the Association of Canadian Pension Management, said the sudden financial reversal at many pension plans is causing Canadians to wonder just how secure their retirement will be.
"I think probably a few years ago most of the public wouldn't have even paid any attention to any of this," Hocking said.
"Now that it affects them directly, or has the potential of affecting them directly, I think they're paying a lot of attention to it".
Several federally regulated Canadian companies have been lobbying Ottawa to change the regulations to give them a longer period to top up shortfalls in their defined-benefit plans".
They argue that such a move would not be a bailout or require any government money, but would allow affected companies to spread out payments to their pension plans over a longer period.
In his economic statement last fall, federal Finance Minister Jim Flaherty said the government would extend the repayment period to 10 years from the current five, but many in the industry say that's not enough.
Several provinces have approved or are considering similar changes.
On Friday, the Department of Finance released a discussion paper asking Canadians how regulations governing corporate pension plans can be improved.
Flaherty said the government will also consult with the provinces with the goal of making permanent changes to the rules this year.
Many companies and pension experts are looking for Flaherty to include measures in his Jan. 27 federal budget to help companies cope with the financial pressures caused by troubled pension plans, at a time when the recession is already eating away at corporate finances.
Paul Forestell, retirement profession leader at financial advisory firm Mercer LLC, said he would like to see a 15-year repayment period so companies aren't forced to cut costs in other areas. Many in the industry fear there could be widespread layoffs if companies are forced to squeeze operations to generate extra cash to top up their pension plans.
Experts warn that some plans in deep financial trouble could be required by regulators to be wound up -- which would lead to lower benefits for all plan members -- and in a worst-case scenario, companies could go out of business if their pension burden becomes too great.
Forestell also added that without a longer repayment period some companies may be forced to delay salary increases or ask employees to increase their monthly contributions.
"The problem will be with the credit markets the way they are right now, (companies) may have trouble generating that cash or it will have to come at the expense of something else," Forestell said.
But most Canadians shouldn't start delaying their retirement plans, he added.
"I think if you're working for a company that is still operating and not struggling a great deal, then you have nothing to worry about, the plans will get funded back to 100 per cent," Forestell said.
"But if you're working in an industry where the company itself is struggling to survive, then there's a bigger risk that the plan would be terminated without sufficient funds to pay the benefits and you'd see a cut in what you're getting paid."
Last week, two reports confirmed plunging stock markets eroded billions of dollars from Canadian pension plans in 2008".
Watson Wyatt Worldwide said the ratio of a typical pension plan's assets compared with its solvency liabilities plunged 27 per cent in 2008, from 96 per cent last January to just 69 per cent at year's end.
Meanwhile, Mercer reported its Pension Health Index fell 23 per cent from the beginning of 2008 to 59 per cent -- the biggest drop since the index was created 10 years ago.
Pension services company RBC Dexia will release its report detailing pension plans' rate of return in 2008 in late January, said Don McDougall, director of advisory services. He added he expects the numbers to be "the worst on record".
"In 2008, there were 1,350 registered pension plans in Canada, of which 351 were defined benefit plans with 391,000 members and $109 billion in assets."
