Bank of Canada Report Optimistic on DB Funding Status

December 8, 2006 (PLANSPONSOR.com) - Running deficits among Canada's corporate defined benefit plans is not a threat to the country's financial system, but funding requirements for Canadian defined benefit plans could deter companies from sponsoring plans.

Such was the message in a recent report published by the Bank of Canada, which suggested stringent government regulations unfairly target corporate plans.

The report downplayed the risk to Canada’s financial market of the underfunding of the plans, which has been a concern since 2000, a time when the equity markets in which¬†pension funds invested a majority of their assets were weak.

According to Reuters, the equity markets have since rebounded somewhat, bettering the funding situation of these corporate plans, with the proportion of plans that were considered severely underfunded decreasing in the first five months of this year.

Even if the news for corporate pension plans as a whole has improved, individual firms could suffer from funding problems and plan members could see a reduction in benefits, increased contributions or elimination of their plans, according to Jim Armstrong, a researcher for the Central Bank and the author of a recent article in the Bank of Canada’s Financial System Review.

In the two and a half years leading up to May 2006, the assets of insolvent plans as a proportion of total assets of all plans studied decreased to 44% from 79%. The aggregate solvency ratio of all plans increased from 93% to 95% and is expected to reach 109% by 2010 if inflation stays low.

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