Many DB plans around the world, including Canada, are in bad shape, according to a study.
The DBRS study, Pension Plans: The 401 Slowdown, finds that the aggregate funding status of 461 plans reviewed fell to a low point of 78.3% in 2012. The credit rating agency considers 80% as a minimum funding threshold.
“For the first time since DBRS began evaluating the health of pensions, the aggregate pension deficit is now in the danger zone,” according to the 541-page study, which looked at plans in Canada, the United States, Japan and Europe.
Although returns on plan assets came in ahead of expectations and sponsors raised contributions to the highest level in a decade, low interest rates and an increase in plan obligations pushed funding deficits higher.
“As long as interest rates remain at current lows, pension deficits will continue to be high,” the study says. “This scenario is particularly challenging for sponsors as employer contributions are already at their highest in 10 years.”
However, the news in Canada isn’t as bad.
The funded status of Canadian plans is 84.4%—six percentage points higher than the average. There were 12 plans below 70%, and all were above the funding level of 55%.
And earlier this week, reports from Aon Hewitt and Mercer showed that pension funds were in better health than they were six months ago.
DBRS finds that a number of plans across the country are in very good shape. National Bank’s plan is 96.9% funded and the best funded on a percentage basis. It’s followed by Canadian National Railway (96.8%), Bank of Montreal (96.5%), Royal Bank of Canada (94.8%) and CIBC (94.6%).
The best-funded plans all had a deficit on an absolute basis, but the agency considers them to be safe and stable. Of all the plans reviewed, Pembina had the lowest deficit of $22 million, followed by Toromont ($27 million), Norbord ($30 million), and Husky Energy and Superior Plus Income Fund (both $33 million).
But there are plans that require significant improvements. Magna had the worst funded status on a percentage basis at 55.4%, followed by Catalyst Paper (60.3%), Canadian Oil Sands Trust (62.1%), Barrick (63.1%) and Agrium (64.6%).
There are also 12 plans with a funding deficit of more than $1 billion, five of which have a deficit above $2 billion: Ontario Power Generation ($3.33 billion), Air Canada ($3.19 billion), Hydro-Que´bec ($2.76 billion), Bombardier ($2.55 billion) and Imperial Oil ($2.22 billion).
While challenges remain for DB plans, DBRS expects their health to improve over the long term because it believes interest rates will eventually rise; companies will be able to make additional contributions to plans because of stronger balance sheets; regulatory changes will require companies to eliminate plan deficits; and obligations should decline because of a shift to DC, outsourcing or a reduction in labour requirements.
And there are signs of improvement as bond yields have risen this year, says the report. “Assuming that plan assets, contributions and benefits remain the same, the rate increase would help bring the funded status above the 80% threshold today.”
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