REPORT: People mistakenly believe their pension plans, mutual funds, and other investments are safeguarded

Canada’s Finance Minister Bill Morneau was one of the country’s top pension fund management professionals before he went into government. But when he recently addressed Concordia University business students, not one asked about the country’s $4 trillion national debt, much of which is pension-related.

That’s not surprising – because, as the Fraser Institute notes, nearly three quarters of those debts are not included in the federal and provincial governments’ financial statements. So, Canadians have no clue how bad the country’s true financial situation is.

This lax reporting is spread throughout the system, including public companies, says one expert.

“Investors are being systematically swindled out of large amounts of retirement savings,” says Al Rosen, a forensic accountant and co-author of Easy Prey Investors, a recently-released book that details shortfalls of Canada’s lax reporting standards.

Accounting scandals abound

“Investors mistakenly believe that their pension plans, mutual funds, and other investments are safeguarded,” says Rosen. “In fact, they are suffering losses that are monumental, compared to individual publicized scams.”

A key challenge, says Rosen, relates to Canada’s use of International Financial Reporting Standards, which “assign excessive power and choice to corporate management, providing them the ability to inflate corporate profits.” Rosen cites a range of accounting scandals including Valeant, Nortel, and Sino-Forest as examples of Canadian laxness.

In one famous fraud case, Bre-X, auditors couldn’t be bothered to check if the company’s gold mine, its only major asset, actually existed. External accountants instead essentially relied on a manager’s claim that he had “found gold” in the core samples he presented to a valuation firm, when they signed off on the statements.

Bucephalous: creative pension assumptions

Those problems aren’t restricted to Canada, says Robert Medd, president of Bucephalus Research Partnership, which has produced research regarding “creative accounting” at Alcoa, Raytheon, UPS and a slew of other global businesses.

“Pension deficits continue to grow,” says Medd. “Investors have yet to focus on the detailed assumptions used by managements and how they might affect pensions’ solvency, valuations and corporate strategies.”

Medd says that assumptions about life expectancies, obligation discount rates, and forecast returns are key areas that management can adjust to (legally) underfund corporate pension plans and thus boost company earnings. “In many cases, pension discount rates and forecast returns have fallen, but nowhere near enough,” says Medd.