The solvency of Canadian defined-benefit pension plans got a small boost last year, thanks to bigger employer contributions to finance deficits.
A barometer by Mercer, a global pension, health and investment consulting firm, said its Pension Health Index was at 82 per cent on Dec. 31, up two points in the fourth quarter and six points for the year.
“The good news is that the financial position of Canadian pension plans improved during 2012,” said Manuel Monteiro, a partner in the firm's financial strategy group. “The bad news is that plan sponsors had to do most of the heavy lifting."
Given the rocky economic and market outlook, that could mean more companies are looking for a way out.
"We're seeing a lot of companies saying how do we shut this plan down, how do we move to a defined contribution plan," said Monteiro.
"Obviously that has big implications for plan members because what that means is that now the plan members are responsible for managing their investments and the pension they get at the end is going to be highly variable," he said of differences between the two types of plans.
“We estimate that only about one in 20 pension plans are fully funded on a solvency basis as of Dec. 31,” said Monteiro.
“This will translate into higher cash funding requirements over the next few years, although this impact could be deferred through the use of temporary funding-relief legislation as well as the use of letters of credit.”
The Mercer Pension Health Index shows the ratio of assets to liabilities for a model pension plan and assumes valuations are filed annually on a calendar year basis. The index assumes a 50-50 liability split between active and retired members, contributions equal to current service cost, as well as no plan improvements and special payments to fund deficits over a 5 year period.