Moody's highlights unfunded pension risk in Quebec, N.L.

Quebec and Newfoundland and Labrador have the largest unfunded pension liabilities among the Canadian provinces, according to Moody’s.

In a wide-ranging report on pension liabilities, the ratings agency found that Canadian provinces achieve good transparency in their pension plan reporting.

But underfunding of defined benefit pension plans for public-sector workers is a credit problem throughout the developed world, it said.

Alberta announced new rules earlier this week that will help it meet its pension obligations, including increased contributions from civil servants and less early retirement.

In Quebec and Newfoundland and Labrador “relatively large unfunded pension liabilities pose a challenge as they are likely to rise for multiple reasons,” Moody’s said in its report.

N.L. suffered after financial crisis

It estimates N.L.‘s ratio of funded liabilities to assets at 54 per cent in 2009, down from 77 per cent a year earlier. The province, rated Aa2 stable, took a substantial loss due to the 2008 financial crisis, Moody’s added and pointed out that deficits are forecast through 2014-15.

“Rising pension costs will add another challenge as the province tries to balance its budget. Newfoundland and Labrador has included pension reform as part of its 10-year sustainability plan, and has committed one-third of its annual surpluses, once achieved, toward the unfunded pension liability,” the report said.

Quebec’s ratio of funded liabilities to assets is 49.2 per cent and the province is rated Aa2 stable.

“"Over the next few years, the province will face pressure to reduce both its relatively high debt burden and unfunded pension liability, within a context of having little room to increase new revenue given its status as a highly taxed Canadian jurisdiction,” Moody’s wrote.

Saskatchewan urged to pay more

It also urged Saskatchewan, which has a “pay-as-you-go” approach, to fully pay its annual pension requirement.

"Saskatchewan is in an unusual situation among Canadian provinces because it began to close all of its defined-benefit pension plans and transition to defined-contribution plans in the 1970s. Enough time has passed since these plans were closed to new members that Saskatchewan can reasonably forecast the required annual payments to members,” Moody’s said.

Provinces with the greatest unfunded pension liabilities should enact reforms to bring their costs down, the report said.

In 2012, Ontario had a small surplus in its pension funds and New Brunswick had the smallest burden, at 8.3 per cent.

The report also highlights the higher risk from pension liabilities among U.S. states. Unfunded pension liabilities are a major issue in settling Detroit's bankruptcy claims.