Pension plans will take longer to bounce back

TORONTO — As some industries continue to struggle with their post-recession recovery, it will likely take longer than expected for Canadian pension plans to become fully funded again, according to a new survey.

TORONTO — As some industries continue to struggle with their post-recession recovery, it will likely take longer than expected for Canadian pension plans to become fully funded again, according to a new survey.

The poll suggested it is overly optimistic to think defined benefit pension plans will return to a surplus in the next two years, while their investments struggle with high global unemployment and the ongoing debt crisis in Europe.

The survey by pension consulting firm Towers Watson indicated fund managers expect interest rates to stay low, which means defined benefit plans need more money to secure payments made to pensioners.

Under a defined benefit plan, an retiree receives a monthly payment based on how much they were paid and how long they worked.

“We’re out of the recession, but we’re not really into growth. We’re kind of in this never-never land so companies are concerned,” said Janet Rabovsky, director of investment for Towers Watson.

“They’ve wrung all the costs out of the system, but they’re not necessarily growing their revenue.”

She said companies are being forced to predict whether they can actually afford to make pension contributions or rely on markets to bounce back so their investments make returns.

“Its a very difficult place for (pension) plan sponsors to be. Some are worried that even if they put money in, they’re going to have trapped capital at some point,” she said.

Norma Nielson, a professor of insurance and risk management at the University of Calgary, said the markets still have a long way to go before pension plans can fill their funding shortfalls.

“(The economic downturn) is kind of compounded in the case of pension plans because their liabilities are very strongly impacted by the interest rates available in the marketplace,” she said.

She said some companies may be forced to sell off assets to make money to cover their pension payments.

But although pension plans may be having trouble recouping their investments right now, they have time to make them back before the baby boomers begin to retire in large numbers, she said.

“The plan may or may not need cash today so the current cash needs versus what they need to fund somebody’s retirement 40 years from now can be quite different,” she said.

The survey Thursday indicates that the majority of fund managers interviewed expect emerging markets like China and India to bring in strong results.

But they’re shying away from risky equity markets, and instead focusing on infrastructure and real estate.

The results of the poll released Thursday were darker compared with a similar one released last week by pension consulting firm Mercer.

Pension fund and other investment managers polled by Mercer said they predicted increased interest rates and global stock markets to “enjoy a solid year.”