Consulting firm Watson Wyatt Worldwide is pouring cold water on reports that warming equities markets are providing relief for plan sponsors with solvency funding problems.
“Despite the recent market rally, Canadian defined benefit (DB) pension plans’ solvency positions are not much improved from the Jan. 1, 2009 position,” says the firm’s latest Pension Barometer report.
According to the report, recent strong asset returns have been offset by rising pension liabilities resulting from a drop in solvency discount rates, with the net result of a “slightly better” solvency position of the typical plan on June 30 than at Jan. 1, 2009.
“After beginning the year at 73% and plunging to 61% at the end of February, the solvency ratio of the typical plan rose to 75% by the end of June,” says the report.
Watson Wyatt suggests that members of DB plans face a risk of their benefits being cut in the event that their employer goes bankrupt while the plan is underfunded.
“Despite this understandable concern, most members of DB plans should take some comfort in the fact that funding standards still provide for an orderly return to fully funded positions in the medium term,” says Ian Markham, director of pension innovation for Canada. “Further, members of DB plans have so far suffered fewer losses and are less exposed to future risk than members of defined contribution pension plans.”
In order to achieve improved solvency ratios, DB plans will require some combination of additional contributions, market gains and higher interest rates, explains Markham, as plan design changes—such as moving to defined contribution for future new hires—will generally not have an impact on costs for several years.
“There remains a great deal of uncertainty about how quickly financial markets will recover and by how much,” says Janet Rabovsky, investment practice leader in Watson Wyatt’s Toronto office. “Recent levels of market volatility will remain with us for some time yet, thus making contributions and the movement of interest rates the key determinants of plan health in the short term.”
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