CANADA - Defined benefit pension plans face stricter funding requirements under the regulator after solvency levels deteriorated due to historically low long-term interest rates and new actuarial rules.
The latest solvency tests by the Office of the Superintendent of Financial Institutions (OSFI) revealed a marked deterioration in the solvency of federal pension plans, with the average estimated solvency ratio falling from 1 in December 2004 to 0.91 in June 2005.
Furthermore, an estimated 72% of federal defined benefit plans were less than fully funded as at June 2005, compared to 53% in December 2004.
As a result, many DB pension plans face higher solvency funding requirements in 2006 and a number of new plans are expected to be added to the regulator’s watchlist.
There are currently 83 pension plans on the watch list, 50 of which are DB and 33 are DC. This differed only slightly compared to six months ago, but Dickson said there would likely be new plans added to the list in the coming months.
Pension plans that give rise to serious concern due to their financial condition or for other reasons, are placed on the watch list and are actively monitored by OSFI.
Julie Dickson (pictured), assistant superintendent to the regulation sector of OSFI described the situation as “stable but fragile,” and said it was important not to overreact. “While 72% of DB plans were under funded, on average the funding shortfall is less than 10%,” she said.
“Thus, the situation can still be described as stable but fragile, but with heightened vigilance being warranted, especially in cases where the funding shortfall is significantly more than 10%.”
The June 2005 results also showed the estimated aggregate solvency deficit of all federal plans in a deficit position was around C$12bn, up from an estimated $4bn in December 2004.
OSFI regulates and supervises about 10% of all pension plans in Canada, representing about 20% of total pension assets.
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