Skip to content

Defined benefit pension health falls

The deteriorating health of Canadian pensions in 2011 is likely to convince more employers to shift burdens to employees this year and force an increase in retirement ages, according to pension consulting firm Towers Watson.

The deteriorating health of Canadian pensions in 2011 is likely to convince more employers to shift burdens to employees this year and force an increase in retirement ages, according to pension consulting firm Towers Watson.

The company said Wednesday that low interest rates and plunging stock markets weighed heavily on defined benefit pension plans, which promise to pay a certain level of post-retirement income.

And that “double whammy” of poor performance is likely to continue in 2012, it said.

Data from the firm’s tracking index found that the funded ratio of a hypothetical defined benefit plan in Canada fell 16.2 per cent from 86 per cent at the start of last year to 72 per cent at year-end.

For Canadian employers that offer defined benefit plans —including some of the country’s best known companies — the drop means larger plan deficits for 2011 and higher pension costs in 2012, said Ian Markham, a senior actuary at Towers Watson.

“The employer side of it will be saying we are having to put an absolute ton of money into our pension plans and it has to come from somewhere,” he said.

If pension plan values do not recover over the long term, retirees may face lower pensions and benefits.

“What that means is either Canadians are going to have to face a lower standard of living in retirement, or they’re going to have to keep working longer,” Markham said.

An aging workforce that may not only weaken workplace morale, but result in an even higher youth unemployment rate, he added.

“With so many people hanging around, then there’s going to be less young people being hired,” he said.

Research from Statistics Canada released late last year found that a 50-year-old worker in 2008 could expect to stay in the labour force another 16 years — 3.5 years longer than would have been the case in the mid-1990s.

Only about 4.5 million Canadians now have guaranteed benefits, most in the public sector. Many companies in the private sector have found the cost of guaranteeing benefits under defined benefit plans too expensive and, in some cases, a threat to their survival.

Many companies have already opting out of defined benefit plans in favour of defined contribution plans, which don’t provide a guaranteed level of retirement benefits.

Some of Canada’s largest companies —including Air Canada (TSX:AC.B) and Canadian Pacific Railway (TSX:CP) have been vocal about problems they face due to massive pension plan deficits.

Markham said RRSPs and defined contribution plans are in the same rough shape as defined benefit plans, but are not measured by the index because it focuses on effects on corporate Canada.

To compile its index, Towers Watson tracks the performance of a hypothetical defined benefit pension plan that was fully funded in 2000 and uses a typical model that allocates 60 per cent to stocks and 40 per cent to bonds.

The financial heath of the plan is based on investment returns, which indicates the amount of assets the plan holds, and long-term interest rates on corporate bonds, which determines the amount of assets needed to pay future benefits to current plan members.

Towers Watson said the typical plan would have generated a 0.5 per cent return in 2011, while liabilities would have increased by 20 per cent, due to the decline in interest rates.