The gap between pension fund assets and liabilities grew in the last half of 2008, as deteriorating market conditions slashed investment portfolios, according to the latest solvency tests by the Office of the Superintendent of Financial Institutions.
As at Dec. 31, 2008, the average estimated solvency ratio for federally regulated defined benefit private pensions was 0.85, down from 0.98 in June 2008.
“Slightly higher interest rates had a small positive impact, as higher interest rates have the effect of lowering pension plan liabilities,” says superintendent Julie Dickson.
OSFI tracks the solvency ratio for 400 federally regulated pension plans, representing 7% of all private pension plans in the country, and 12% of pension assets.
“[The decline] is not a surprising number—everybody knows the equity markets went down, so the funded position would have declined,” says Paul Forestell, professional leader for Mercer’s retirement, risk and finance business. “In terms of the size of the drop compared to past history, it’s a big drop.”
He suggests that most pension plans are probably in better shape now than they were at the end of 2008, partly because of market conditions, but mainly due to changes in how liabilities are calculated. The Canadian Institute of Actuaries changed the standard for calculating payments out of plans, he points out, and it has been recognized that annuities are now much cheaper for plans to purchase today.
In December, Dickson’s office sent a letter to plan administrators instructing them to start considering their options in the event of a protracted market downturn.
“OSFI continues to encourage plan administrators and sponsors to use scenario testing as a risk management tool,” she said in that letter.
In the short-term, Forestell says plan sponsors will have to increase contributions to their plans. After that, the risk profile of the plan will likely be re-examined.
“I think the challenge will be that they will be a little gun-shy, given what has happened to equity markets in the last six months,” he says.
While it may be difficult to convince the investment committee to return to the stock market, most plans are now far from their target allocations, holding large over-weight positions in fixed income.
“If they have a policy that they are 60% equity and 40% fixed income, they’re probably off of that policy right now because fixed income market did better, whereas equity markets went down,” he points out. “In some companies’ cases, I think they might be directing all the new money toward equities to get back in the range they have specified.”
Alternatively, plans may be matching assets to liabilities, either investing in infrastructure and real estate as a hedge against inflation, or buying annuities to lock in their income stream.
(04/16/09)
 | Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com |