If data from a recent DBRS study are correct, the uproar over private sector defined benefit (DB) plans in the wake of plunging equity markets is a tempest in a teapot. In fact, solvency levels are better now than they were in 2002.
The DBRS review of 70 DB plans at Canada’s largest private sector companies found that the plans were 95% funded, compared to 98% funded in 2007. The credit rating agency points out that real problems arise only when pension plan obligation funding falls below 80%.
“In fact, with the past emphasis on reducing pension deficiencies, pension plans are in a strong position to fulfill this goal over the medium term, once an economic recovery begins,” says Peter Schroeder, managing director with DBRS.
The plans collectively had $149 billion in obligations and $141 billion in assets, representing an $8-billion underfunding gap. Only 15 of the 70 plans (21%) in the study had funding gaps of greater than 20%—an improvement from 2002, when 31% of plans were underfunded.
“For the vast majority, the situation is manageable as plans started in a relatively solid position and there has been some regulatory relief. It is safe to say that 2009 performance will be better than 2008, but it remains uncertain whether or not plans will meet expectations,” says Schroeder. “From a long-term perspective, most plans would improve reasonably quickly with higher asset returns.”
The study included pension plans from organizations such as Air Canada, the major banks, Manulife, Nortel, Rogers Communications, Teck Resources and BCE Inc.
Not surprisingly, the study foresees a continued shift into defined contribution plans due to the financial risk involved in DB plans.
“Defined benefit pension plans have created pressure on liquidity, albeit manageable, at a time when companies have reduced financial flexibility to resolve underfunded positions,” DBRS said. “When they have a choice, companies have been moving to defined contribution plans, which effectively shift the burden to employees. This trend is expected to continue for the foreseeable future.”
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