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How new mortality calculations could hit pension plans

These are stories Report on Business is following Tuesday, Aug. 6, 2013.

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Towers Watson warns on pensions
Proposed new mortality measures could soon hit employer pension plans, a major advisory firm warned today.

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The bottom line in the Towers Watson report is this: Just as things are looking up for pension plans, the fact that we're living longer may soon officially change assumptions, undoing the recent gains from stronger stock markets and rising interest rates.

Towers Watson based its report on new, draft mortality tables unveiled last week by the Canadian Institute of Actuaries. These are used to measure how much pension plans require to meet their obligations to retirees going forward.

"Although the effect will vary from plan to plan, adoption of the proposed mortality tables and acceptance of the study's prediction of future mortality improvements could also immediately increase pension accounting liabilities by 5 per cent to 10 per cent for many plans, potentially impacting corporate income statements and balance sheets," Towers Watson said.

The proposed new tables increase the life expectancy of a 60-year-old man by 2.9 years, and for a woman by 2.7 years.

Much of the impact, of course, would be on "defined benefit" pensions, where employer plans pay a set amount after retirement.

But companies whose employees are under "defined contribution" plans, where the amount paid in is pre-set, could also be affected, though in different ways.

"Increasing life expectancy could mean that employees with a DC or capital accumulation plan will need to save more in order to afford retirement," said Michelle Loder of  Towers Watson.

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"This could result in employees delaying their retirement until they have accumulated sufficient retirement savings, possibly challenging employers' ability to manage career progression and workforce objectives."

There's an interesting aside here, what Towers Watson called a "potential twist" for employers in the public sector, in that the CIA study showed that life expectancy is greater for public service workers.

"While this may be good news for public sector employees and pensioners who are largely covered by DB plans, there will be financial implications to consider," said Gavin Benjamin, one of the firm's senior retirement consultants.

The CIA is giving interested parties until Sept. 30 to comment on the proposals.

Fight escalates
A battle between Sony Corp. and Daniel Loeb, in which George Clooney plays an extra, escalated today as the electronics and entertainment giant rebuffed the U.S. hedge fund activist's push for a partial spinoff.

This saga has been playing out for a while, gaining broader interest last week when Mr. Clooney accused Mr. Loeb as someone who "knows nothing about our business."

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Through Third Point LLC, Mr. Loeb says he owns some 7 per cent of Sony shares, and is pushing the company to sell as much as 20 per cent of its entertainment operations via a public stock offering.

Today, Sony publicly released a letter to Third Point saying that "while we share with you the objectives of increasing profitability and driving shareholder value, after careful review, the Sony board of directors has unanimously concluded that continuing to own 100 per cent of our entertainment business is the best path forward and is integral to Sony's strategy."

Sony, which recently reported a quarterly profit, added in the letter that it has options should it require more capital, a response to Mr. Loeb's suggestion that the company could raise $2-billion (U.S.) through a partial spinoff.

"Should we require capital, or in the event of unanticipated events, our priority would be to raise it without selling a portion of an asset fundamental to our growth strategy, and without unnecessarily burdening Sony's ability to execute our business strategy for both entertainment and electronics."

Last week, Mr. Clooney, whose Smokehouse Pictures is affiliated with Sony, slammed Mr. Loeb in an interview with the Deadline Hollywood website.

"I am no apologist for the studios, but these people know what they are doing," Mr. Clooney said. "If you look at the industry track record, this business has made a lot of money"

Mr. Loeb's Third Point said today it would continue discussing the issues with Sony, suggesting the fight will continue.

"Third Point looks forward to an ongoing dialogue with management and intends to explore further options to create value for Sony shareholders," it said.

Trade gap narrows
Canada's trade deficit narrowed in June as exports increased at more than double the pace of imports.

Exports climbed 1.4 per cent, Statistics Canada said, boosted by precious metals and precious metal alloys, auto and aircraft. Volumes rose 2.1 per cent, while prices slipped 0.6 per cent, the federal agency said.

Imports, in turn, rose by 0.6 per cent, largely on oil imports. Notably, import volumes slipped 0.5 per cent, while prices increased 1.1 per cent.

Over all, the trade deficit declined to $469-million from $781-million in May, though the May numbers were revised to show a heftier shortfall.

Exports to the United States rose 1.5 per cent, while imports from Canada's biggest trading partner dipped 0.8 per cent, increasing the country's trade surplus with the U.S. to $3.8-billion.

But the rise in imports from other countries eclipsed the pace of export growth to those regions, by 3.3 per cent to 1.4 per cent, widening the trade gap with the rest of the world to $4.3-billion.

"Over all, a solid reading in a month where we feared that flood conditions might disrupt two-way trade flows," said chief economist Avery Shenfeld of CIBC World Markets.

Separately, the U.S. Commerce Department said America's trade deficit also shrank, to $34.2-billion (U.S.), marking the smallest gap since the depths of the recession in the fall of 2009.

Observers believe the June trade showing in the United States indicates that the first reading of economic growth – 1.7 per cent annualized in the second quarter – may have been understated. In and of itself, that would be a good sign for the Canadian economy.

"The sharp improvement in the June trade deficit points to net exports acting as a support to the pace of growth in the second quarter rather than a drag as indicated in the advance release last week of real GDP for the quarter," said assistant chief economist Dawn Desjardins of Royal Bank of Canada.

Every reading is key, of course, because of what it could mean to the timing of a pullback in the Federal Reserve's asset-buying program, known as quantitative easing or QE.

Markets have been soaking up every bit of data to try to peg when the Fed will start the so-called tapering process.

"As the body of data supporting an acceleration in the economy's growth accumulates, the timing of the Fed tapering its bond purchases grows nearer with this process likely to get under way in the fall," said Ms. Desjardins.

Australia cuts key rate
Australia's central bank today cut its key interest rate again, citing slower growth and, in particular, a hit to the mining industry.

The Reserve Bank of Australia cut its cash rate by one-quarter of a percentage point, to 2.5 per cent, adding that the Australian dollar, while down over the past few months, remains strong. It would help if the depreciation continues, it said.

"In Australia, the economy has been growing a bit below trend over the past year," said central bank governor Glenn Stevens.

"This is expected to continue in the near term as the economy adjusts to lower levels of mining investment."

Analysts believe Mr. Stevens will continue to ease.

"The more interesting aspect of its decision was a country not mentioned in the statement: China," said Derek Holt and Dov Zigler of Bank of Nova Scotia.

"While the Australian economy performed modestly in [the second quarter], it hasn't really deteriorated in a meaningful way. On the other hand, the underperformance of the Chinese economy has been fairly clear."

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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