What are Solvency and Going Concern Deficits?

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.
(5) http://laws-lois.justice.gc.ca/eng/regulations/SOR-87-19/section-2-20060322.html

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