Canadian pension plans took a turn for the worse in 2011, a report from a major consulting firm said Wednesday.
Towers Watson has kept a tracking index to represent defined benefit pension plans across the country for more than a decade. In 2011, the index declined from 86 at the start of the year to 72 by the end. The index was at 100 in December 2000 and after a brief rise in 2001, has been on a steady decline ever since.
The company said low interest rates and plunging stock markets weighed heavily on defined benefit pension plans across the country last year.
"For many organizations, these conditions have resulted in larger plan deficits at the end of 2011 and will lead to higher pension costs in 2012 and beyond," Towers Watson's Ian Markham said in the report.
The figure suggests that the typical Canadian defined benefit pension plan was 86 per cent funded on an accounting basis at the start of 2011. All else being equal, that same plan would have been only 72 per cent funded at the end of the year, unless the plan sponsor made additional contributions to shore up the plan’s financial health.
A defined benefit pension plan is one that attempts to provide a guaranteed income for plan members in retirement. It differs from a defined contribution plan, which only promises to invest a certain amount of money over time, but offers no guarantee of a particular payout. (In broad terms, defined benefit puts the risk with those who run the plan, while defined contribution plans put the risk on the plan member.)
Only about 4.5 million Canadians now have guaranteed benefits, most in the public sector. Many companies in the private sector have found the cost of guaranteeing benefits under defined benefit plans too expensive and, in some cases, a threat to their survival.
The TSX declined by 11 per cent last year, a problematic development as pension plans are strained by an aging workforce. A typical pension plan that was invested 60 per cent in stocks and 40 per cent in bonds last year would have earned about 0.5 per cent this year, Towers Watson said. But that meagre gain was likely more than offset by a 20 per cent increase in liabilities because of a decline in interest rates.
So unless a plan took steps to offset those liabilities, it would be underfunded. "DB plan sponsors are acutely aware of the downward trend in interest rates, and potential volatility in the stock markets," Towers Watson investment consultant Roland Pratte said. "In response, many have already taken steps to reduce the size of their DB pension liabilities. For 2012, plan sponsors should continue to work on managing their pension financial risks."
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