Many pension plans dangerously underfunded, report claims
But Canada in better shape than U.S., DBRS study says
Canadian-owned ratings agency DBRS has raised a red flag on defined benefit pension plans following an investigation into 461 pension plan funds in Canada, the U.S., Japan and Europe.
In a massive report, DBRS said that at the end of 2012, the average pension fund had just enough money to cover only 78.3 per cent of the future benefits it would have to pay out, below the 80 per cent level the agency considers "a minimum funding threshold."
The report says this is the first time in a decade that the funding level has dipped this low.
Only 41 per cent of funds remained above the threshold, down from 45 per cent last year.
"Last year was a very rugged year," Kent Wideman, managing director of credit policy at DBRS, said in an interview on CBC's Lang & O'Leary Exchange, "interest rates went down, which is not a good thing for pension plans".
"As long as interest rates remain at current lows, pension deficits will continue to be high", the report says.
"The pension shortfall of $536 billion is massive and will take great effort to eliminate in the absence of changes to the interest rate environment."
The report says that the average interest rate earned by funds was 4.01 per cent, a record low. But if these rates were to increase by 1.5 percentage points to just 5.5 per cent, the funding gap could disappear by 2014.
Canada a step ahead
However, Canadian pension plans seem to be faring better than their counterparts in the U.S. — the average funded status on the 67 Canadian funds the report looked at was 84.4 per cent.
Only 12 Canadian funds were below 70 per cent funding, and none fell below 55 per cent. No funds were more than 100 per cent funded.
The report also highlighted the 20 Canadian funds with the largest funding deficits, and the 20 with the smallest gap.
At the top of the worst-funded list was Ontario Power Generation, which has a pension deficit of $3.3 billion, followed by Air Canada, which has a deficit of $3.2 billion.
Among the 20 worst-funded are BCE, Telus, and three financial institutions (Manulife Financial, Scotiabank and Royal Bank), all of which have a funding deficit of more than $500 million.
The report is a contrast to two other pension surveys out earlier this week that suggested a rise in long-term interest rates had improved the standing of many defined-benefit pension plans, as it reduced their liabilities.
In the second quarter of 2013, long-term interest rates rose by 70 basis points — 0.7 percentage points — not far from the 150 basis points DBRS says would be needed to get pension plans back in good financial shape.
Wideman admits that given climbing interest rates in the past few weeks, pension plans are looking much better.
"If we were to do our study again for June 30th, most of the companies would probably have 6 to 8 per cent higher [solvency] percentages."