Bombardier Inc. is getting smaller, but its pension deficit – the gap between what it owes employees in retirement and the money it has on hand to pay them – is getting bigger.
The company’s annual financial statements filed Thursday reveal that the deficit in the company’s defined-benefit pension plans crept up to US$1.97-billion at the end of 2019, versus US$1.92-billion in 2018.
The numbers have remained stubbornly high in recent years even as Bombardier sheds businesses, their employees and the pension obligations that come with them. The deficit in the company’s pension plans spiked to US$2.2-billion in 2016 and has only fallen gradually since, despite divestitures and other techniques to reduce obligations.
While analysts and investors are focused on Bombardier’s looming debt, the pension deficit is an additional obligation that has received less attention. And on top of the pension, Bombardier also owed US$273-million in other retirement benefits, such as health care, to its workers.
The numbers could change dramatically if the company succeeds in disposing of more of itself. Bombardier is on the verge of selling its rail business to French industrial giant Alstom SA. The sale is seen as a crucial cash-generating step for the company, as it owes more than US$9-billion to banks and bondholders.
Bombardier chief financial officer John Di Bert said Thursday that about 40 per cent of the company’s pension deficit comes from its transportation division and 60 per cent from aviation.
Many older companies, from manufacturing to retail to transportation, have struggled with defined-benefit (DB) pension plans, which promise retirees a set payout usually based on a formula that includes salary and years with the company. Fluctuating interest rates and irregular investment returns can create a mismatch between what’s owed and the assets of a plan – and if the gap isn’t narrowed, big companies can find themselves pumping hundreds of millions of dollars into their pensions.
Younger companies offer only defined contribution (DC) plans, which put the investing onus on the worker, and the payout in retirement uncertain. Bombardier cut off access to the DB plans for all newly hired Canadian and U.S. employees in September, 2013, putting them in DC plans instead. It closed its British DB plans as well.
Bombardier’s 2019 financial results show the wild swings that can cause stomach upset for plan sponsors. The present value of future payments to retirees – the plan’s liabilities – are discounted to today's dollars using an interest rate. The lower the interest rate, the bigger the present-day value.
Falling interest rates in 2019 were the biggest contributor to a US$1.45-billion increase in liabilities because of changes in assumptions. (Every change of 0.25 percentage points in Bombardier’s assumed interest rate adds or subtracts US$514-million to liabilities, the company says.)
The flip side: Investment returns added an extra US$954-million to the plan.
The year-end 2019 pension numbers have already removed the 4,000 employees of the company’s Aerostructure business, scheduled for sale in 2020, and the US$414-million deficit for their pensions.
Without that change, the deficit would have topped US$2.3-billion – a dollar amount that’s roughly 75 per cent of the company’s market capitalization.
With a report from Nicolas Van Praet
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