Lump of coal for pension plan sponsors

Barring a miraculous recovery in the next couple of weeks, 2014 will turn out to be a disappointing year for pension plan sponsors, says Mercer.

The year started with a lot of promise as many pension plans were at or close to a fully funded status due to buoyant stock markets and a sharp increase in interest rates.

Also, most observers expected interest rates to increase further in 2014 and the funded status of pension plans to improve even more.

Read: Funded status of Canadian pension plans dips

In reality, the reverse occurred with long-term interest rates in mid-December again testing the 60-year lows hit in mid-2012.

The solvency funded status of the typical pension plan has deteriorated by about 10% over the course of 2014 due to the decline in interest rates and deteriorations in annuity pricing. This was partially offset by strong equity performance and the effect of the falling Canadian dollar on foreign asset returns.

Read: 5 pension trends to watch

“Pension plan sponsors can expect to make higher pension contributions in the coming years,” says Manuel Monteiro, a partner in Mercer’s financial strategy group. “Financial statements will also reveal significantly higher year-end 2014 pension liabilities and 2015 pension costs.”

With the improved funded positions at the beginning of the year, he adds many plan sponsors began to consider reducing their risk exposure by increasing fixed income allocations or offloading portions of their liabilities through an annuity transaction.

“Some plan sponsors successfully reduced their risk exposure,” Monteiro notes. “However, as funded positions and interest rates began to slide, other plan sponsors became increasingly unable or unwilling to act.”

Also read: