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Canada pension deficit understated, think tank says

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Canada's unfunded employee pension obligations are $80 billion more than the federal government has previously revealed, according to a report from a high-profile think tank.

The market-friendly C.D. Howe Institute said on Tuesday that liabilities for federal government pension plans total $227 billion, far more than expected in a recent official update.

The research institute said it arrived at its total by using fair-value accounting standards applied to private-sector plans.

"Ottawa's calculations do not reflect investment returns available in the real world," William Robson, one of the report's authors, said in a statement.

Robson said Ottawa calculates its figures using a moving average of past nominal 20-year Canadian government bond yields and an assumed return that is currently about 4.2 percent.

"Both these interest rates are well above anything currently available on any asset that matches the plans' obligations," added Robson. "Any Canadian who does not work for the federal government and wanted a tax-backed, inflation-indexed pension would need to save far more money than these plans hold for his or her federal employee counterpart."

Government bond yields have tumbled in recent years after the Bank of Canada slashed interest rates in response to the global financial crisis.

Canada's 10-year bond yield hit multi-decade lows last week. The 30-year yield plunged to a record low of 2.573 percent, barely above the rate of inflation.

The study's authors point out that these pension obligations are effectively part of Ottawa's debt.

A spokeswoman for the Treasury Board, which helps oversee federal spending, defended the government's methodology.

"These accounting practices used by the government of Canada provide the most appropriate basis of accounting when market related values and risk factors are long-term in nature, such as pension liabilities," Treasury Board spokeswoman Jenn Gearey said in an email.

"Liabilities related to the pension obligation are included in the audited financial statements of the government of Canada, which are audited annually by the Office of the Auditor General. The government's financial statements have received unqualified audit opinions for the past 12 years."

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