Pension Relief Needed Now: Study

“We urge governments across the country to provide temporary relief to employers from potentially large, unexpected contributions to their pension plans at a time when they can least afford it,” says David Burke, retirement practice director of Watson Wyatt’s Canadian office. “Extended amortization periods for funding solvency deficits are important at this time. The best form of benefit security for plan members is a strong employer.”

Burke explains that while some plans are sound, others face potential contribution increases as much as six times greater for 2009 than 2008, a situation which puts organizations in a tight spot considering the current state of credit markets.

Adhering to current solvency funding requirements is detrimental to plan sponsors, he explains, as it puts the financial health of an organization at risk in order to satisfy accounting practices based on a stressed market.

“Given that we have an unusual situation, does it make sense to force plan sponsors to make these additional contributions because you’re marking to a market that is allegedly broken today?” he asks. “Mark-to-market doesn’t work if the market is broken.”

Watson Wyatt’s research also highlights a discrepancy between an organization’s funding requirements and the funded status for financial disclosure purposes, where high-quality corporate bonds are used to reduce liabilities, offsetting the fall in the market value of pension assets.

Unlike the solvency rules used to determine cash contributions, the funded status of a typical pension plan for financial statement purposes has actually increased two to four percentage points this year, according to the research. Burke says this is further evidence that relief is required until the economic crisis is resolved.

“The disparity between the rapidly decreasing funded status for contribution purposes and the increasing funded status for financial disclosure purposes really shows the potential issues with mark-to-market accounting and funding in the current market,” he says. “Relief on funding requirements will be critical for plan sponsors unless the markets improve significantly.”

The duration of the proposed relief period should be flexible, Burke says, in order to see plan sponsors out of the current predicament and to allow provincial expert commissions to put forth more permanent solutions.

“We’re not talking about anything that’s long term, as the various expert commissions are doing their best to deal with those issues,” he says. “I think what we need is a bridge to allow us to get there.”

To comment on this story, email jody.white@rci.rogers.com.