Canada's largest public companies have seen a dramatic improvement in the health of their pension plans, with the average funding level rising to 97 per cent in 2013.
A review of 25 public companies that have the largest defined benefit pension plans in Corporate Canada – dubbed the $2-Billion Club because all have pension plan obligations of $2-billion or larger – shows median funding climbed to 97 per cent in 2013 from 86 per cent a year earlier, which means pension plans are almost back to a fully funded level after struggling with years of shortfalls.
The study by Russell Investments Canada Ltd. said the 25 largest corporate pension plans in Canada saw their aggregate funding shortfall decline to just $5-billion at the end of 2013 from $21-billion a year earlier.
Kendra Kaake, senior investment strategist at Russell Investments, said an increase in long-term interest rates was the biggest factor in the funding improvement in 2013, but higher investment returns and special cash contributions to fund shortfalls were also both important factors in improving pension plan health.
"The funded status is improving, but it's a combination of the three [factors]," she said in an interview. "In this particular year, interest rates were more significant than the other two by a marginal amount."
Ms. Kaake said pension plans had anticipated earning investment returns in 2013 of between 5 per cent and 7.5 per cent, and ended up earning far more on average as stock markets soared. "Returns were better than we had expected," Ms. Kaake said.
The 25 plans studied earned $16-billion in investment returns last year as total assets climbed from $131-billion to $149-billion by the end of the year, after subtracting the cost of benefits payments and the addition of new contributions.
The study also showed that the remaining funding shortfall for Canada's 25 largest corporate pension plans has become a much smaller risk relative to the size of the companies.
The unfunded pension liability declined to just 0.4 per cent of the companies' combined market value from 3.5 per cent a year earlier, while the unfunded pension obligation as a percentage of cash flow fell to 4.5 per cent from 19.7 per cent.
The Russell Investments report also examined how pension plans for companies in the $2-billion Club would fare in the event of five different possible financial market crises.
It shows, for example, that a repeat of the stock market declines seen during the global financial crisis in 2008 and 2009 would cause the funded status of pension plans to fall to 84 per cent on average from 97 per cent currently.
A one-percentage-point decrease in interest rates would push the funded status of pension plans down to 86 per cent from 97 per cent, the report said, while a 10-per-cent decline in stock markets would reduce pension funding on average to 91 per cent.