CANADA - The solvency levels of Canada's corporate defined benefit (DB) pension plans improved, on average, by about 5% in 2004, according to new research released by Watson Wyatt.
However, the consultant said that the improvement was largely due to extra contributions made by plan sponsors, rather than stronger investment returns.
The Pension Barometer(TM), analysis released by Watson Wyatt Canada, shows that the typical plan improved to a 90% funded level at the end of 2004, up from 85% funded at the start of the year. Ian Markham (pictured), director, Pension Innovation, Watson Wyatt Canada said: While this data shows that solvency levels are moving in the right direction, it is important to note that this improvement was in large part due to the extra contributions being made by many plan sponsors toward their pension deficits, as required by government regulations.
Without these contributions, solvency levels would only have modestly improved from last year. The gains created by the 8 to 10% investment returns typically experienced by pension funds in 2004 were mostly offset by losses caused by the lower bond yields that measure the solvency liabilities. Markham also noted that this improvement in solvency levels will likely be more than wiped out by new pension actuarial standards being introduced in 2005.
New standards from the Canadian Institute of Actuaries for determining lump sum commuted values come into effect on 1 February, 2005 and will affect solvency liabilities.
Watson Wyatt said that while these changes will generally provide improved benefits to employees leaving their employers before retirement, they will put increased pressure on plan sponsors in terms of increased costs.
Markham said that if market conditions remain at current levels, solvency will likely decline by over 5% for many plans, and up to 10% for some, as a result of the new standards. On the investment front, the analysis found that, just as in 2003, pension plans that were invested more heavily in equities and long bonds fared best in 2004.
And the consultants urged plan sponsors to review their pension plan design.
David Burke, head of Watson Wyatt Canada's Retirement Practice said: While effective plan governance and appropriate investment and actuarial policies can help manage the risk, the long-term solution may best evolve from a review of plan design. There are plenty of innovative ways to share risks and rewards between employers and plan members, and sponsors would be well advised to examine such initiatives.
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