Chapter 16

In previous generations, employees yearned for a stable job where they could work until retirement. The dream included a reasonable pension that allowed retirees the chance to enjoy a comfortable life. However, changes in demographics and economics have altered the retirement landscape. These changes not only affect the employees but also the companies for which they worked. Bombardier Inc., a Canadian manufacturer of aircraft and rail transportation systems, provides an example of the effects of these changes.

At the end of December 2014, Bombardier reported a net loss of $1.2 billion USD. Contributing to this loss was a net pension expense of $400 million, an amount that represents over 70% of the company’s loss before tax and interest. But this expense only tells part of the story. Bombardier also reported pension plan assets of $8.8 billion and a pension plan obligation of $10.9 billion, leaving an unfunded obligation of approximately $2.1 billion. This unfunded obligation had increased by over $500 million from the previous year, but still represented an improvement over the company’s highest unfunded obligation of $2.9 billion, reported in 2011.

Pension obligations represent the present value of future payments to be paid to retired employees. These payments are often based on the employees’ highest salary during their employment and usually continue until the employees’ death. Because of this, the actual amount paid out in the future can only be estimated, and this is done using an actuary. Actuaries are professionals trained in statistical sciences who use existing data and assumptions to make these predictions. With improvements in medical technologies, people are living longer than they once did, and actuarial calculations of the pension obligation reflect this. As well, investment returns on pension plan assets suffered during the 2008 financial crisis and resulting recession. Increased pension obligations and reduced returns have increased the unfunded amount of pensions for many companies, including Bombardier.

A further complicating factor is the rate used to discount the obligation. In Bombardier’s case, a 1% drop in the discount rate used in 2014 resulted in an increase in the pension obligation of over $1.4 billion. This was offset, in part, by improved asset values, but this discount rate provides an example of a factor that management cannot control.

Many companies carry similar unfunded pension liabilities on their balance sheets and it is becoming increasingly challenging for managers to deal with this problem. A drastic way to address the growing liability is to stop admitting new members to the pension plan. Bombardier did this in 2013, and other companies have taken similar steps. This may limit the scale of the problem, but the managers still need to find ways to fund a liability whose amount changes in response to unpredictable factors. The managers also need to deal with the more subtle and complex problem of managing employee expectations when those employees receive differing levels of benefits. This, in fact, may prove to be a bigger challenge than finding the funds to maintain existing plans.

(Source: Bombardier, 2015)