Companies prioritize dividends, buybacks over pension deficits: CCPA

Large Canadian companies have ramped up payouts to shareholders rather than dealing with their pension shortfalls, says a new report from the Canadian Centre for Policy Alternatives (CCPA).

New research from the Ottawa-based think tank compares shareholder payouts (dividends and share buybacks) with pension deficits at the 90 companies in the S&P/TSX Composite Index that have defined benefit (DB) pensions (representing 88% of DB assets).

It finds that, as of 2017, shareholder payouts reached $66 billion ($50 billion in dividends and $16 billion in buybacks), while pension deficits sat at $12 billion.

“These companies could have easily eliminated their pension deficits and still continued shareholder payouts,” the CCPA says.

The paper notes that two-thirds of the companies it reviewed could eliminate their pension funding deficits in a given year, and that most of the companies with the largest deficits pay out more to shareholders each year than their pension shortfalls.

“Allowing pension benefits to remain underfunded while distributing income to shareholders should be understood as another form of corporate risk-shifting. By redeploying cash to shareholders and away from pension obligations, companies are forcing plan members to assume greater risk, without any additional return to compensate for this exposure,” the report says.

The CCPA argues that pension regulations should be revised to push companies with healthy balance sheets to deal with their pension deficits.

“It is time for more co-ordinated pension regulation that considers firms’ financial strength rather than simply focusing on the financial status of the pension plan,” it says. “At present, pension deficits are treated essentially the same, regardless of whether they are sponsored by a financially-healthy firm or a company that desperately needs capital to sustain the business.”

For instance, it recommends that regulators make shareholder payouts contingent on companies more quickly dealing with their pension deficits, or that they restrict dividends and share buybacks when a pension plan falls below a set funding threshold.

Additionally, the paper argues that governments should be further bolstering public pensions.

“Ultimately, enhancing public options for retirement security in the Canada Pension Plan, Old Age Security and Guaranteed Income Supplement is the simplest and most comprehensive way to ensure a comfortable retirement for all Canadians,” it concludes.

Read the report here.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.