Funding Pensions with IOUs. Is Your Pension Backed by Cash - or Just a Promise?

CALGARY, May 3, 2017 /CNW/ - Pension plan have had a bumpy ride. Given the sluggish recovery from last decade's financial crisis and the difficulty for pension funds to grow amid persistent low interest rates, it perhaps is understandable that more companies are using standby letters of credit (SBLC) as IOUs for their employee pensions. The letters provide the companies more flexibility with their capital, and diminish the risk that, should returns to pension funds rise again to more normal rates, there could be a "trapped surplus." But why are public sector companies and Crown corporations using letters of credit in place of cash deposits to pensions?  They certainly do not face the same capital pressure.

Today, The School of Public Policy and authors Norma L. Nielson and Peggy L. Hedges released a report that examines available evidence the motivations for the use of SBLCs to fund shortfalls.

According to co-author Nielson, "Unfortunately, there is a troubling lack of available data as to which organizations have been using letters of credit in place of cash contributions to pension funds. Clearly they are proving useful for some companies, although the exact reasons why are unclear, but that includes some companies that would appear to have plenty of capital flexibility, so the rationale for their use might not be what the policy anticipated. Meanwhile, it is unclear why so many other companies have chosen not to avail themselves of this temporary pension-funding relief, despite the advantages it offers for avoiding the risk of trapped surpluses."

Taken together, it would seem that there are signs that the policy changes allowing pension-funding relief might be serving their purpose and might be helping companies that could use it, but there is a worrying lack of information to be sure how well they are working and what problems may loom. It certainly seems like a close review is in order.

The report can be found online at http://www.policyschool.ca/publications/

SOURCE The School of Public Policy - University of Calgary

For further information: To request an interview with the author or for more information please contact: Morten Paulsen, 403.220.2540, Morten.paulsen2@ucalgary.ca

RELATED LINKS
http://www.ucalgary.ca/policystudies/

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