Ontario defined benefit pension plans experienced the biggest quarterly drop in their funded status since the financial crisis in 2009, provincial regulators said Monday.
The Financial Services Regulatory Authority of Ontario (FSRA) estimates plans’ median solvency funding – which is the ratio of assets to the estimated cost of paying future benefits – fell from 99 per cent at the end of 2019 to just 85 per cent at March 31. The report covers private-sector plans sponsored by companies and public pensions serving government employees.
The drop confirms estimates made by pension consultants earlier this year and suggests many plans that were previously comfortably above regulatory minimum funding ratios fell below them as markets grappled with COVID-19.
FSRA said it estimated that 48 per cent of Ontario defined benefit plans were fully funded at the end of 2019 – with more assets than estimated liabilities – but that proportion fell to just 14 per cent by the end of March.
Canadian stocks, as measured by the S&P/TSX Composite Index, fell by 34 per cent from their 2020 high on Feb. 20 to their low on March 23. They’re now up about 35 per cent from the low, but remain down 11 per cent for the year.
FSRA estimates the typical Ontario plan had about 44 per cent of its money in stocks, based on the plans’ most recent filings. At the same time, benchmark interest rates on government bonds have declined to near record lows, which has increased pension plans’ estimated benefit liabilities.
Regulatory changes made before and during the COVID-19 crisis, however, mean employers may not need to spend more on their pensions in the short term to top up the shortfalls in their plans.
Before 2018, Ontario pension funding rules required defined benefit plans to have a solvency ratio of 100 per cent, or else employers had to make extra payments to push their pensions back to that level. The 2018 changes dropped that minimum funding ratio to 85 per cent, meaning many more plans were deemed healthy and escaped the special payments.
FSRA estimates the proportion of plans with funding ratios less than 85 per cent swelled from just 10 per cent at the end of 2019 to 51 per cent at the end of the first quarter. The equity rebound since March 31 likely shifted many of those plans back above the minimum ratio. Also, many plans are able to file regulatory valuation reports as of last Dec. 31 – showing much better funding – and avoid having to make any shortfall payments for three years.
Since the COVID-19 crisis hit, FSRA has issued a range of new pension guidance and rules, including implementation of the provincial government’s relief program for employers struggling to pay their assessments for provincial pension insurance. Ontario is the only province with a formal pension insurance fund that will pay a portion of a plan’s benefits if the pension’s sponsor employer fails.
When FSRA becomes concerned about the security of the promised benefits, it can also designate a plan “actively monitored," and subject it to an enhanced level of supervision and engagement.
In its quarterly report, FSRA said it “is observing wide variations in how different pension plans have been affected by the pandemic, and where applicable, is following” the supervisory approach of placing plans in actively monitored status. FSRA spokeswoman Judy Pfeifer said the number of plans becoming actively monitored since Feb. 20 is confidential information.
The solvency ratio is the toughest measure of a defined benefit plan’s health; it estimates the current value of the liabilities based on the idea the sponsor must wind down the plan immediately and pay out all the benefits employees have earned to date. A “going concern” method assumes the plan sponsor stays in business and has time to collect more contributions.
Canadian regulators have been moving away from solvency measures, either by looking at going-concern numbers instead, as Quebec did, or by dropping the minimum ratio, as Ontario did. Those moves concern Mike Powell, president of the Canadian Federation of Pensioners, who says he believes pensions are at greater risk now because of temporary and permanent solvency relief measures implemented over the past five years, which haven’t been coupled with new pension protections.
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David Milstead