on going concern Archives - Canada's Modern Post

The Canada Post Pension Plan 2010 Annual Report declared:

“The Plan ended 2010 with an estimated solvency deficit of $3.2 billion and a going-concern deficit of $174 million. These deficits resulted from the sharp declines in global capital markets in 2008 and lower discount rates (long-term interest rates used to calculate pension liabilities). Lower discount rates increase pension liabilities and make it more costly to fund pension benefits.”(1)

It appears to be a critically important statement, but what exactly does “solvency deficit” and “going-concern deficit”mean?

A phone call to Canada Post’s Pension centre did not clarify the situation but some searching on the internet gave some important clues.

What is a solvency deficit?

Barbara Austin, Blake, Cassels & Graydon LLP in a document published in 2007 gave a good description:

“Pension standards legislation in every jurisdiction includes minimum funding rules for defined benefit plans. The purpose of these rules is to provide assurance that adequate funds will exist to pay for all defined benefits promised, with due regard to stability of contribution levels and the possibility of unfavourable outcomes now and in the future.”(2)

In other words, the pension plan has to have enough money to be self-sufficient regardless of the state of the parent company. If the company goes under, in receivership, liquidated, etc. the pension can continue with its commitments.(3)

In the case of Canada Post, it needs to contribute $3.2 billion dollars over the next five years, as required by law, to meet the solvency requirement.

This is a complex formula that is calculated for Canada Post by an actuarial company by the name of Mercer.

It is not predictable at all. Moya Greene, ex-CEO of Canada Post documented how volatile this solvency requirement can be.(4) The company cannot properly budget for this on a yearly basis.

An important question should be raised, why should Canada Post be obligated to have a solvency deficit when it can’t go bankrupt? It is a crown corporation with assets guaranteed by the Government of Canada. The answer is not known.

What is an on-going deficit?

This phrase is not commonly found. The Department of Justice has it broken into three categories:

“going concern assets” means the value of the assets of a plan, including income due and accrued, determined on the basis of a going concern valuation; (actif évalué sur une base de permanence)

“going concern liabilities” means the present value of the accrued benefits of a plan, including amounts due and unpaid, determined on the basis of a going concern valuation; (passif évalué sur une base de permanence)

“going concern valuation” means a valuation of the assets and liabilities of a plan using actuarial assumptions and methods that are in accordance with accepted actuarial practice for the valuation of a plan that is not expected to be terminated or wound up; (évaluation sur une base de permanence)”(5)

What Canada Post means by on-going deficit is the going concern valuation.

What it means for Canada Post today is this: how much extra do they need to contribute, over and above regular payments, to insure that the daily operations have enough cashflow for the next year?

This is all based on a complex formula that sometimes puts Canada Post in a positive position and other times negative. It is not entirely predictable.

This explanation is written and researched by a letter carrier at Canada Post with a background in literature, language and international development, not economics. This is for information purposes only and if further clarifications are required, please contact a professional in this area.

(1) Canada Post Pension Plan 2010 Annual Report. ND. NP. Pg. 1
(2) http://goliath.ecnext.com/coms2/gi_0199-7032692/Update-Pension-Solvency-Funding-Relief.html
(3) The Government of Alberta has published an even more detailed description than this that can be found by clicking on this link.
(4)http://www.parl.gc.ca/Content/SEN/Committee/403/fina/04evb-e.htm?Language=F&Parl=40&Ses=3&comm_id=13
(5) http://laws-lois.justice.gc.ca/eng/regulations/SOR-87-19/section-2-20060322.html

What is the state of the Canada Post Pension, and what are all the numbers about? Here is Moya Greene’s perspective before a parliamentary committee in 2009 while she was still CEO of Canada Post:(1)

Senator Callbeck:So how much of that came about in the year previous because of the downfall in the economy?

Ms. Greene:A considerable amount. There has been a high degree of volatility in the solvency deficit of our pensions and many pensions mostly because of discount rate.

Senator Marshall, please do not take this in a bad way, but as much as our accountants over the past 10 years have driven us to be more transparent, I am not sure we are quite there when it comes to pension accounting. The solvency deficit has fluctuated quite a bit over the five years I have been at the company because of changes in discount rates. It is important to note that on a going concern basis there is no deficit in the Canada Post pension; it has a surplus of $597 million. The solvency deficit is calculated in a different way where the discount rate that you use to calculate a solvency deficit is different than the discount rate you use to calculate a going concern is different than the discount rate that you use on an accounting basis for pensions.

In our case, the solvency deficit relies heavily on the rate of real return bonds, which has moved quite dramatically over the five-year period. The solvency deficit has gone from a $1.6 billion deficit five years ago to a $1.6 billion solvency surplus in year three to a $2 billion solvency deficit in 2010.

The reason the solvency deficit is such a difficult thing for us to manage at Canada Post is because the rules on paying for a solvency deficit require you to pay the deficit over a five-year period, and the cash drag of paying for the solvency deficit over that short a period of time is enormous.

For example, in 2010 we will put $800 million of cash into our pension. That is an enormous amount of money by anyone’s imagination, and about $300 million is for regular contributions to the pension, but $500 million is for paying off, over the five-year period, our $2 billion solvency deficit. As discount rates change, of course, that number can change dramatically.

Our pension is so big relative to our company. Our pension liability is about $14 billion, and it sits on top of a company that has $7.3 billion of revenue and generally makes less than $100 million unconsolidated. You do not need to be Senator Marshall or an actuary to see that as a huge liability. Even the minor changes in the discount rate and the way in which you calculate these various matters of solvency and going concern deficit can have an important impact on how much cash you have to put into the pension. It is unmanageable because you do not know from one six-month period to the next how much you will have to put into the pension. It is hard to predict.

I am happy to say that our people enjoy a very good pension. It is one of the promises that were made to postal workers back to when we had the department of the post office. I am pleased to say I will be able to honour those obligations for now.

With our planned modernization and with our new way of looking for new sources of revenue for the business, we will never fall into the impossible situation the United Kingdom or the United States find themselves today. However, there is no question that the pension is a huge liability.

(1)http://www.parl.gc.ca/Content/SEN/Committee/403/fina/04evb-e.htm?Language=F&Parl=40&Ses=3&comm_id=13

Tag: on going concern

What are Solvency and Going Concern Deficits?

2009 State of the Canada Post Pension