Following significant net improvement through 2006 and 2007, there has been little net change but significant volatility in the GAAP funded positions of Canadian pension plans over the first half of 2008, according to a recent analysis conducted by Watson Wyatt.
Reflecting the sharp decline in equity markets early in the year, typical pension funded ratios dropped three percentage points from 106% to 103% in the first two months of 2008. This decline was followed by an eight percentage point gain from March to May and then another four percentage point drop to 107% in the month of June.
“While pension funding levels were slightly better at the end of June than at the end of 2007, they remain highly volatile,” said David Burke, retirement practice director of Watson Wyatt’s Canadian offices. “Moreover, the small net improvement in funded ratios in 2008 must be attributed to further increases in the yield rates available on AA corporate bonds rather than stock markets, and there is a very real possibility that this trend in yields could reverse.”
Additional findings from Watson Wyatt’s analysis include:
• Over the first six months of 2008, conservatively invested funds had positive returns that tracked close to long-term expectations. Aggressively invested funds (those with 50% or more invested in equities) did not.
• Funds with higher allocations to U.S. equities than assumed in our model portfolios may not have fared so well. However, funds that engaged in various degrees of currency hedging would have fared significantly better.
• With yields on Government of Canada bonds lower, the solvency ratio for a typical plan, after rising above 100% in the summer of 2007, has retreated to 89% at the end of the second quarter.
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U.S. Pension Funding Ratios Rise
UBS Global Asset Management says the overall health of a typical defined benefit pension plan in the United States improved in the second quarter as interest rates rose.
According to its U.S. Pension Fund Fitness Tracker, the typical pension fund ended the quarter with a funding ratio of about 93%, up from 90% at the beginning of the quarter.
Higher interest rates, which decreased the present value of pension liabilities, more than offset the drop in assets, causing the funding ratio to rise.
“Markets remained volatile throughout the second quarter as investors reacated to higher energy prices and inflation concerns,” says Aaron Medler, the firm’s head of asset liability investment solutions in the Americas.
“Investor sentiment picked up in the beginning of the quarter as the ‘doom and gloom’ scenario for the economy seemed to be overblown,” he adds. “However, a higher-than-expected May unemployment number and a pick up in inflation, driven by surging commodity prices, caused an increase in investor risk aversion during June.”
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Few U.S. Employers Offer Phased Retirement
A majority of American employers don’t have a phased retirement plan in place, finds a study.
The Institute for Corporate Productivity’s study reveals that 77% of companies don’t have a plan in place and 68% of respondents don’t currently have initiatives to encourage the retention of retirement-eligible employees.
“It’s remarkable that so few companies are proactively addressing retirement issues, especially when you consider the wave of baby boomers who are almost eligible for retirement now,” says Jay Jamrog, the Institute’s senior vice-president of research. “Unfortunately, it appears most will probably not worry about it until the day they see it walking out the door for good.”
However, the study suggests that some companies will take action as 10% of respondents say they are planning to institute such programs.
Of the organizations that currently offer phased retirement options, half say they have a formal policy regarding the issue. But these companies are lukewarm on their policies’ effectiveness; just two in 10 say they feel their phased retirement programs are successful to a high extent. Two-thirds view their programs as successful to “some” extent or to a “moderate” extent.
A total of 267 organizations participated in the study, which was done in conjunction with HR.com.
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Women Less Prepared for Retirement Than Men in U.S.
A study reveals that despite having a more powerful presence in shaping the American workforce, women continue to be less prepared for retirement than men.
The Hewitt Associates study finds that both men and women are on track to replace 85% of pay at retirement, assuming average life expectancy.
However, women, on average, need to replace nearly 130% of their final pay at retirement—seven percentage points more than men. When factoring differences in longevity, that disparity jumps 10 percentage points. Over 30 years, the average woman will need to save 2% of pay more per year than the average man to reach the same standard of living.
“There are multiple barriers women face that automatically put them at a disadvantage when it comes to meeting adequate retirement income levels—some of which are preventable and some of which are not,” says Alison Borland, defined contribution consulting practice leader at Hewitt Associates.
Multiple factors, both financial and socioeconomic, contribute to the gap in retirement income replacement rates between women and men. Those factors include women’s likelihood to make less and live longer, invest less assertively, and delay retirement saving and having spotty saving patterns.
“But despite these challenges,” she says, “it is possible for women to make a significant impact on the amount they amass in their retirement nest eggs if they are willing to understand the challenges they face and take a few small steps toward improving their saving and investing behaviours.”
To close the gap, Hewitt suggests that women invest earlier and at a more vigourous rate, put off retirement for a few years, take advantage of advice, and keep money invested in retirement plans.
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Newfoundland and Labrador Passes Pension Legislation
The Government of Newfoundland and Labrador has passed legislation that will force pension plan sponsors to fully fund any deficits on wind up.
Under the new legislation, a plan sponsor that intends to wind up a pension plan will be required to fully fund the benefits provided under the plan.
The changes to the Pension Benefits Act, 1997 came into force last month and will apply retroactively to pension plan terminations taking place after Apr. 1, 2008.
Multi-employer pension plans are exempted from the amendments to the Act.
For background information on this story, click here to read Newfoundland and Labrador Amends Pension Benefits Act.
To see a copy of the legislation on the province’s website, click here.
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BetaPro Launches Emerging Market ETFs
BetaPro Management has launched two new exchange traded funds (ETFs) based on the MSCI Emerging Markets Index.
The Horizons BetaPro MSCI Emerging Markets Bull Plus ETF is designed to provide daily investment results, before fees and expenses, that correspond to two times the daily performance of the MSCI Emerging Markets Index.
And the Horizons BetaPro MSCI Emerging Markets Bear Plus ETF is designed to provide daily investment results, before fees and expenses, that correspond to two times the inverse daily performance of the MSCI Emerging Markets Index.
“Many investors have increased their portfolio exposure to emerging markets to capture the above-average growth potential they see,” says BetaPro’s president, Howard Atkinson. “But volatility in these markets remains high and the range of returns across various emerging markets can vary widely. Our new emerging market ETFs can help investors more effectively manage their exposure to this important asset class.”
Both ETFs begin trading on the Toronto Stock Exchange on Wednesday and will be denominated in Canadian dollars. Any U.S. dollar gains or losses as a result of each of these ETFs’ investments will be, whenever possible, hedged back to the Canadian dollar.
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AEGON Expands Relationship with RBC Dexia
RBC Dexia will provide investment accounting services to AEGON Canada for its portfolio of 160 funds worth $8.5 billion.
“Based on our positive working relationship with RBC Dexia, we are confident that our clients and employees will benefit from RBC Dexia’s global operating model and strong focus on client service excellence,” says Paul Reaburn, president and CEO of AEGON Canada.
One of the key features of this relationship involves the integration of AEGON Canada’s investment accounting employees into RBC Dexia’s operation in Toronto.
AEGON Canada provides life insurance and investment products through its operating subsidiaries Transamerica Life Canada, AEGON Fund Management and AEGON Capital Management.