(The Canadian Press circulated the following story on November 21.)
TORONTO — Canadian Pacific Railway Ltd. is kicking an extra $300 million into its pension plan — the latest Canadian company forced to deal with pension shortfalls caused by poor stock markets and low interest rates.
The announcement helped push CP Rail’s stock down by 6 per cent to $35.10 on the Toronto Stock Exchange yesterday, despite predictions by the company that it expects profit growth next year of about 20 per cent.
Canada’s second biggest railway, behind Canadian National, announced early yesterday that it would make a voluntary prepayment of $300 million in December to its defined-benefit pension plan. The money will come out of CP Rail’s cash balances.
The pension fund “is in a solid position, but three years of bear markets and extremely low interest rates require some adjustments to how we manage our funding obligations,” said Rob Ritchie, CEO of Calgary-based CP Rail.
The prepayment is in addition to this year’s service costs of $55 million for the defined-benefit plan. The CP Rail plan is one of the biggest in Canada, with about $5 billion in assets to pay retirement benefits for 16,000 employees.
However, the plan reported an accounting deficit of $721 million at the end of 2002.
The problems faced by CP Rail’s pension plan mirror similar issues at companies such as steel maker Stelco Inc., which have big unfunded pension liabilities and face big shortfalls to pay future retirees.
Pension expert Malcolm Hamilton, a principal at Mercer Human Resource Consulting, noted that many companies put more than half of their pension assets into stocks, which plunged during the technology bust and have been far more volatile than bonds in recent years.
Ritchie said the prepayment will reduce the pension plan’s unfunded liability by increasing the asset base, allowing the fund to invest more money in stocks and bonds and eventually pare down its deficit.