Canada Addresses Underfunding in Strong Commitment to Pensions

October 24, 2005 ( - Though the typical Canadian pension fund is close to being fully funded, 40% of plan sponsors say the most pressing issue for their plans is underfunding.

In a press release, Greenwich Associates said the average funding ratio of Canadian plans increased from 95% in 2003 to 97% in 2004 thanks in part to strong market returns.   Greenwich Associates consultant Rodger Smith said that several of Canada’s largest pension funds are still seriously underfunded, though.

The Greenwich Associates’ 2005 Canadian Investment Management study found that the number one consideration in fund officials’ strategy for funding is the elimination of the Foreign Property Rule (See  Canadian Foreign Property Rule Change To Benefit US Bond Market ).   Around 25% of sponsors plan to increase their allocations to foreign investments and another 30% are considering an increase.   After the removal of the rule that no more than 30% of a fund’s assets be allocated to foreign investments, sponsors in a special study by Greenwich Associates plan to increase foreign equity allocations by 13%, non-domestic alternatives by 50%, and foreign fixed-income allocations by almost 70%. 

In addition, the study found that Canadian funds reduced domestic equity allocations from 2003 to 2004, while increasing allocations to domestic fixed income and alternative asset classes.

The focus on the underfunding issue shows the commitment Canada has to its defined benefit pension plans.   Only 20% of Canadian plan sponsors have closed their defined benefit plans to new employees, compared to half of sponsors in the UK, and just 3% say they intend to do so over the next two to three years.   The continued devotion of Canadian plan sponsors to their defined benefit plans can be attributed in part to funding levels that are stronger relative to those of funds in the US, and to the fact that Canadian regulators have not embraced mark-to-market accounting to the same extent as their counterparts in the UK, according to the release.

Smith said in the release, “…Canadian funds seem to be rolling up their sleeves and saying, ‘bridging the funding gap is a challenging task, but we are committed to our defined benefit plans and we are ready to do the work necessary to preserve them.’