Pension underfunding has become quite material for some Canadian firms and is having an influence on debt ratings, according to a report by Moody’s.
“While on a stand-alone basis an underfunded pension plan will not drive the rating process, it does raise a red flag as to future funding requirements and their potential impact on cash flow,” says Waylon Iserhoff, vice president – senior accounting analyst.
The credit rating agency says there two factors leading to underfunding. Under law, plan evaluations are generally performed only once every three years, allowing for plans to become significantly underfunded during the intervening period.
“Any pension overfunding in a bankruptcy belongs to the members, not the company,” he says. “And this, together with tax code limitations on overfunding encourages systematic underfunding.”
Based on 2005 financial results, Moody’s says the following 12 Canadian-based companies have significant underfunded deficiencies:
| Company | Underfunded Pension(millions) |
| Alcan | $3,105 |
| Nortel | $2,910 |
| BCE | $2,431 |
| Bombardier | $2,624 |
| Abitibi-Consolidated | $874 |
| CP Rail | $842 |
| Quebecor World | $518 |
| Petro-Canada | $378 |
| Thomson Corp. | $343 |
| Domtar | $282 |
| Tembec | $274 |
| Fraser Papers | $204 |
Source: Moody’s
To comment on this story email craig.sebastiano@rci.rogers.com.