Solvency of Canadian pension plans solvency at historical lows

Sponsors of Both Defined Benefit and Defined Contribution Plans Face a Challenging 2009


Toronto (8 January 8, 2009) – Market declines caused by the global financial crisis have left the solvency of Canadian defined benefit (DB) pension plans at historical lows and defined contribution (DC) plan members with shrinking retirement savings, according to an analysis by Watson Wyatt Worldwide, a leading global consulting firm.

The pension solvency funded ratio (the ratio of market value of plan assets to plan solvency liabilities) of the typical pension plan declined 27 percentage points in 2008, dropping from 96 percent at the beginning of the year to 69 percent at year-end. Watson Wyatt’s Pension Barometer, which reflects the combined impact of investment performance and interest rates on the solvency funded ratio of a typical Canadian pension plan, indicates that the funded status of the typical pension plan decreased 11 percentage points in the fourth quarter alone.

“Canadian pension plans are certainly reflecting the declines in financial markets. However, members of DB plans will be at risk only if the company does not survive long enough to fully fund the plan,” said David Burke, retirement practice director of Watson Wyatt’s Canadian offices. “What’s most troubling is that the significantly higher pension contributions that will be required to offset sizeable investment losses are placing additional strain on companies and negatively impacting corporate capital investment plans for 2009 and beyond.”

“Because the best form of benefit security for plan members is a financially healthy employer, we are pleased to see various governments taking steps to provide temporary funding relief for DB pension plans.”

Recently the National Union of Public and General Employees (NUPGE) released a policy paper – Pensions and the Economic Crisis – which called on governments to to consider a temporary extension of the time lines for making up shortfalls in pension plan funding, which currently have to be made up within five years.

The paper noted however that there are risks to this approach, especially for the workers whose pension plans could be in jeopardy if the current market downturn continues for an extended period of time.

To minimize the risk to workers, the NUPGE policy paper argued that certain legislative conditions must apply:

  • Extending the five-year period for making up deficits should be on a case-by-case basis and should not extend beyond 10 years;
  • There must be minimum catch-up contributions made each year to the plan;
  • Requests should require approval of the bargaining agent, or the active plan members and the retirees − and allow full access to corporate financial records and any plans for restructuring; and
  • Employers must be prepared to negotiate with the union to give it a greater say in the administration and management of the plan including joint trusteeship and shared ownership of any future surpluses.
  • NUPGE’s paper also recommended that in the short term, the federal government and provincial governments need to guarantee that defined benefit (DB) pension plans will not go under. “If our federal government can use public funds to help stabilize Canada’s financial institutions during difficult economic times, then it should be able to ensure that pension plans that workers rely on for retirement security are protected. This would provide important economic stimulus while guaranteeing that workers retire in dignity.”

The paper also suggested that DB pension plans should be encouraged as a matter of public policy. “We should create incentives through our tax system that encourage employers to have DB plans.”

Watson Wyatt also noted that assets in defined contribution (DC) plans experienced significant losses in 2008, as the value of typical DC plan participants’ retirement accounts decreased by 10% to 20%.

“As defined contribution plan participants watch their account balances fall, their anxiety levels are likely to rise,” said Dan Morrison, a senior retirement and investment consultant with Watson Wyatt in Calgary. “And with investment losses making retirement less affordable, expected retirements may be deferred.”

The range of losses experienced represents portfolios invested in: 1) 40% equities and 60% bonds, and 2) 60% equities and 40% bonds.

More information:

Protect pension plans and retirement savings

Issues and Campaigns