Canadian banks dogged by new pension rules have hope

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New optimism for pension plans is giving Canadian banks hope, just a month after the lenders booked bigger expenses to close pension funding holes.

During the last bank earnings season in December, new accounting rules dictated that Canadian lenders had to incur bigger pension costs for the 2013 fiscal year. Many also had to restate previous years' earnings to reflect bigger backdated expenses.

The effects ranged from bank to bank. National Bank of Canada booked an additional $55-million expense for 2013, while Royal Bank of Canada's climbed by $125-million – a relatively small amount given that its total profits are more than five times bigger than National's.

The expense changes were widely expected, given that the new accounting rules were announced long ago and were expected to come into effect for fiscal 2014. Yet the extent of the expense hikes could only be estimated by analysts.

The higher expenses stem from two key changes. Banks must now record the value of pension surplus or deficit on their balance sheets, and book actuarial gains and losses on the income statement. They must also change the discount rate used to calculate their pension fund values, using one that better reflects current market rates.

Yet it is unclear just how long the banks will have to keep booking bigger expenses. If interest rates rise and equity markets stay strong, the additional costs could quickly fade because their pension funds will be earning better returns.

Pension consulting firm Mercer already noted this week that the markets are moving in favour of Canada's pension plans. Because equity markets have been hot, and bond yields started to rise in 2013, Mercer predicts that the average plan in Canada is 99.9 per cent funded. Better yet, they expect pension plans to see their funded status improve a further 3 per cent in 2014.

The banks themselves have differing views of the future, and its effect on their pension expenses. "We're assuming that our pension expense after this adjustment… is going to be relatively flat next year," TD chief financial officer Colleen Johnston said on a conference call. CIBC, meanwhile, suggested that its additional $70-million annual pension expense, before taxes, in 2013 will likely persist and RBC also said it expects a "modest increase in pension expense" going forward.