The impact of last year’s downturn on Canadian pension plans has yet to be fully felt, according to a Towers Perrin research paper on pension financing. The combined impact of lower pension fund assets and higher plan liabilities will force many employers to make up this gap through higher future pension contributions.

According to the report, which will be released on Wednesday, organizations which sponsor defined benefit pension plans should anticipate higher costs arising from negative equity returns in 2001, exacerbated by pension liabilities which are higher than anticipated.

Towers Perrin’s analysis demonstrates that the impact of the 2001 markets will seep into pension plan costs in 2002 and beyond, including both funding requirements and the expense which is reflected as a cost in the sponsor’s reported earnings. For many employers, the study suggests that the funding “holidays” they have enjoyed for years may be over, and that the pension costs for this year will have a significantly larger and more dramatic impact on corporate earnings.

“As unfavourable as they are, the results would have been worse if the equity markets hadn’t rebounded somewhat during the last quarter of 2001,” says co-author Gerry Schnurr. “But even with this rebound, some employers are looking at multi-million dollar increases in their pension costs.”

“The findings of this study will be especially unpleasant for those who have large pension obligations,” says co-author Eric D’Amours. “In some cases, these pension obligations are comparable in size to the organization’s net worth. A 10% surprise in this scenario translates into a significant amount. The good news is that there are ways to mitigate and defer the immediate costs, giving employers more time to plan.” The study identifies different tactics that management can use to reduce the immediate cost increases.