It’s sunny days for Canadian pension plans. According to a survey by Watson Wyatt Worldwide, Canadian plans’ funded ratios are the highest they’ve been in five years. The survey indicated that the funded ratio(that is, the ratio of assets to liabilities)of the typical defined benefit pension plan was 105% at the end of last month. This is up from 89% a year earlier.

Watson Wyatt reported that while the 2006 ratio was driven by a combination of strong investment returns and rising interest rates, this was not the case for 2007. This year’s improvement has been driven largely by higher interest rates.

David Burke, retirement practice director of Watson Wyatt’s Canadian offices, said that Canadian pension plans haven’t been this well funded since April 2002. However, Burke notes that cost volatility still looms in the background. Such incidents as market swings or interest rate shifts could cast a cloud or two.

However, at this point, he said, there may be an opportunity for some plan sponsors to reduce future risk. “The typical plan has now developed a small cushion against future adverse experience. Given improved funding ratios and the recent market conditions, some sponsors will now find it more palatable to move to a more conservative investment strategy,” he said.

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