A new report finds the financial health of large corporate DB pension plans has improved markedly since the recession of 2008.
A report published Wednesday by Russell Investments finds the largest 25 corporate plans in Canada are fully funded for the first time in years.
"It's good news. This is the first time in a long time," said Kendra Kaake, co-author of the report, in an interview with Wealth Professional.
The report looked at the corporate pension plans of the largest 25 Canadian listed corporations. These companies have pension obligations in excess of $2 billion and represent 50% of all corporate pension liabilities in Canada. According to the report five years after the onset of recession the bulk of Canadian defined benefit pension plans are doing well.
The good news follows the confluence of the three factors that determine plan solvency. In 2013 the market return on funds was double-digit. Discount rates didn't go down (that is, the interest rates on bonds that fund large portions of the liabilities were steady). Cash contributions from the companies sponsoring the plans also increased. "In 2013, all these forces came together in a positive way,” says Kaake.
Under Canadian law companies have five years to fund an existing liability. The market correction in 2008 created a funding shortfall. Five years on, companies have topped up their pension plans. All-in, the funded status increased from 86% in 2012 to 97% in 2013. A $21 billion deficit turned in a $5 billion deficit in 2013, a nearly 80% decrease in the total shortfall.
The good news comes after a disappointing 2012. That year returns were "fantastic," said Kaake, but discount rates dropped. "In 2012 un-funded liabilities increased. The liability side overtook the good returns,” says Kaake.
Now, with solid financing in place, the door is open to allocation changes at the plans says Kaake. With plans fully funded a “frozen” DB plan (one not open to new members and so fixed in terms of liabilities) should be looking at de-risking by moving to longer duration fixed-income or making an annuity purchase.
"It's good news. This is the first time in a long time," said Kendra Kaake, co-author of the report, in an interview with Wealth Professional.
The report looked at the corporate pension plans of the largest 25 Canadian listed corporations. These companies have pension obligations in excess of $2 billion and represent 50% of all corporate pension liabilities in Canada. According to the report five years after the onset of recession the bulk of Canadian defined benefit pension plans are doing well.
The good news follows the confluence of the three factors that determine plan solvency. In 2013 the market return on funds was double-digit. Discount rates didn't go down (that is, the interest rates on bonds that fund large portions of the liabilities were steady). Cash contributions from the companies sponsoring the plans also increased. "In 2013, all these forces came together in a positive way,” says Kaake.
Under Canadian law companies have five years to fund an existing liability. The market correction in 2008 created a funding shortfall. Five years on, companies have topped up their pension plans. All-in, the funded status increased from 86% in 2012 to 97% in 2013. A $21 billion deficit turned in a $5 billion deficit in 2013, a nearly 80% decrease in the total shortfall.
The good news comes after a disappointing 2012. That year returns were "fantastic," said Kaake, but discount rates dropped. "In 2012 un-funded liabilities increased. The liability side overtook the good returns,” says Kaake.
Now, with solid financing in place, the door is open to allocation changes at the plans says Kaake. With plans fully funded a “frozen” DB plan (one not open to new members and so fixed in terms of liabilities) should be looking at de-risking by moving to longer duration fixed-income or making an annuity purchase.
