Pension plans begin to regain footing

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The financial health of Canadian pension plans has improved in recent months, leaving the average plan at about the same funding level it was facing in mid-October last year as the market downturn was taking hold.

A new analysis of pension funding by consulting firm Watson Wyatt shows the average pension plan was 75 per cent funded as of June 30, which means it had assets equal in value to about 75 per cent of the fund's estimated liability for future pension payments.

Ian Markham, director of pension innovation for Canada at Watson Wyatt, said the funding level is still "critical" for pension plans, but is a significant improvement from the worst point hit in late February, when the average defined benefit (DB) pension plan was just 61 per cent funded.

"Most members of DB plans should take some comfort in the fact that funding standards still provide for an orderly return to fully funded positions in the medium term," Mr. Markham said in a release Wednesday.

Pension plans were about 85 per cent funded last August before the market downturn began in September, according to Watson Wyatt's analysis. By the end of December, the average plan was 73 per cent funded.

Plans began to recover in March, however, as equity markets began to climb. Watson Wyatt said the recovery in stock markets would have pushed the current funded status of pension plans to an even higher level, but the recovery was offset by a corresponding decline in long-term interest rates.

Pension plans are significantly affected by interest rates because the plans measure the value of their estimated pension liabilities based on long-term bond yields. The decline in rates has created higher pension liabilities, which have significantly offset the gains in asset values so far this year.

Watson Wyatt said the result is that the 75-per-cent solvency position of a typical pension plan was only slightly better on June 30 than it was on Jan. 1, when it was 73 per cent.

This means pension plan sponsors are still facing "onerous" cash requirements to bring their traditional defined-benefit pension plans up to a funded level, Watson Wyatt said. And while governments across Canada have offered temporary relief to give plan sponsors more time to fund their shortfalls, "the financial burden of offering a DB plan is causing concern for many companies."