Financial turbulence hits Canadian pension funds hard: Study

Extended amortization periods could help employers

The current financial crisis is creating extreme uncertainty for employers with defined benefit pension plans and may result in huge increases in 2009 contribution requirements, according to a recent study.

Since August 2008, the solvency position of the typical pension plan in Canada has worsened considerably, driven primarily by decreases in asset values. As a result, Watson Wyatt's Pension Barometer found many plan sponsors will have to make much higher contributions in 2009 to fund the additional deficiencies, which are generally required to be funded over five years.

“There’s a great deal of uncertainty about how quickly financial markets will recover and whether governments will provide at least temporary relief from 2009 solvency funding requirements,” said Doug Chandler, senior retirement consultant at Watson Wyatt. “It all adds up to a big question mark about how much cash plan sponsors will be contributing to their pension plans in 2009.”

The federal and provincial governments need to provide temporary relief to employers from potentially large, unexpected contributions to their pension plans at a time when they can least afford it, said David Burke, retirement practice director of Watson Wyatt in Canada.

“Extended amortization periods for funding solvency deficits are important at this time. The best form of benefit security for plan members is a strong employer," he said.

Given the large decline in equity markets and the continuing credit crisis, it is not surprising to find that the solvency ratio of a plan invested in 60 percent equities and 40 percent bonds has declined rapidly over the last five months. While more conservatively invested plans have fared better, they've still seen some losses.

“Even conservatively invested pension plans have experienced significant deteriorations in their solvency funded position, leading many to revisit the question of risk and return – what is an acceptable compromise," said Janet Rabovsky, investment practice leader in Watson Wyatt’s Toronto office.

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