CANADA - Risk management is the key to dampen the 'rollercoaster' effect pension plan funding levels have experienced in recent times, according to Watson Wyatt.
David Burke, retirement practice director of Watson Wyatt's Canadian offices, said: "While pension funding levels were slightly better at the end of June than at the end of 2007, they remain highly volatile.
"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," he added.
The average plan's funding ratio fell 3% to 103% in the first two months of 2008. The following three months saw them regain some 8%, then drop back to 107% by the end of June.
Burke warned the widening spreads between the yields available from corporate and government bond were historically wide and could retreat, significantly impacting on funding ratios.
Watson Wyatt also found solvency levels had been hit by poor equity market performance and national government bonds yields. The average solvency level fell from over 100% in summer 2007 to 89% at the end of June 2008.
Carl Hess, global director of investment consulting at Watson Wyatt, said: "It remains essential for plan sponsors to proactively manage pension risk.
"With volatility in financial markets likely to continue throughout this year, sponsors can seek more stability with liability-driven investment strategies that align the movement of plan assets and liabilities."
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