The solvency of Canadian defined benefit (DB) pension plans has improved since its mid-February low, but the plans are still at risk, according to a Watson Wyatt Worldwide study.
The solvency ratio of Canada's DB pension plans rose to 75% in June, which means, pension plans had 75% of the assets required to fund pension liabilities. That was far higher than the 61% reported in mid-February when equity markets crashed to new lows.
While the increase offset most of the negative returns in the first two months of 2009, pension liabilities continued to increase almost at the same level as assets in the first six months of the year. The solvency ratio remains well below the 90% range pension funds held a year ago before the full impact of the financial crisis and subsequent recession was felt.
According to the study, the depressed solvency of DB plans place members' benefits at risk. Members may find their benefits cut if their employer goes bankrupt and the plan remains underfunded.
For companies, low funding levels and continuing low investment returns could result in onerous cash requirements to boost pension plan solvency.
In recent years, companies have either converted their pensions to defined contribution plans or have stopped providing DB plans to new employees, instead registering them with a separate defined contribution plans. The study found that 30% of Canada's publicly traded companies who have DB plans are considering converting to defined contribution plans.
But the switch to defined contribution plans will still take years and will not necessarily improve the solvency of DB plans, which require a combination of more contributions, market capital gains and higher interest rates.