CANADA - Canada's financial stability could be at risk by the discovery that current methods of accounting for public sector pension obligations may have been understating their true costs by C$58bn (US$56.3bn), a think tank said.
Research from C.D Howe Institute showed that a fair-value bookkeeping approach to evaluating the costs of Canada's civil service, military and police pensions exposes a potential black hole in Ottawa's defined benefit coffers.
The study argues that understating the cost of net pension obligations means that the national finances are much weaker than thought and that surpluses over the years should have been deficits.
Government balance sheets showed net obligations of C$139.9bn as of last March, versus C$197.7bn calculated using the fair-value approach.
The institute said the government's figure was achieved by smoothing values for assets based on expected returns and using discount rates that are higher than those available on low-risk investments at the valuation date to calculate liabilities.
"This practice makes obligations look smaller than their true value, as measured by what it would actually cost to buy participants out, or offload the obligations to an insurer," said C.D. Howe president and chief executive William B.P. Robson.
The financial crisis has sounded the deathknell of the DB scheme in the private sector as a change in reporting standards has forced companies to acknowledge their promises are less secure and their costs to cover participants greater.
But so far that perception of riskiness and expense has not, in general, affected the public sector in the same way because of the greater reporting freedom they enjoy even though the exposure of taxpayers, who ultimately underwrite the schemes, creates a further layer of accountability.
"Experience in steel, cars, telecoms and other mature industries has shown how understating the cost and volatility of DB obligations can lead plans to run accumulated deficits larger than their sponsors can cover, leaving pensioners short and/or taxpayers picking up the pieces," said Robson.
"We need to get a better handle on public-sector pensions before similar accidents happen on a more colossal scale," he added.
Mark Evans has been appointed as a director at Independent Trustee Services (ITS) to lead trustee appointments in London.
The Pension Protection Fund (PPF) is consulting on changes to the actuarial assumptions it uses in valuations in a bid to better reflect the bulk annuity market, with schemes set to move into surplus on aggregate.
Private sector defined benefit (DB) schemes were 96.3% funded on a Pension Protection Fund (PPF) compensation basis at the end of July, according to the lifeboat fund's monthly index.
Conduent has completed the sale of its actuarial and human resource consulting business to private equity investor, H.I.G. Capital.