Canadian DB Sponsors May Have to Double Contributions

January 6, 2012 (PLANSPONSOR.com) - Many Canadian employers that provide a defined benefit (DB) pension plan for their employees may find themselves having to double their contributions or more, this year in order to meet solvency requirements, according to Aon Hewitt.

The median pension solvency funded ratio—the ratio of the market value of plan assets to liabilities—is approximately 15% lower this year than at the start of 2011 due to lower interest rates and the stock market decline. With the solvency position of Canadian DB plans only in the 68% range—down from around 83% a year ago—plan sponsors that will file an actuarial valuation this year will need to add extra funds to comply with minimum funding rules that assure DB plans can meet their pension promises.    

As a result, employers may be pressing pension regulators for further funding relief, if such relief has not already been granted.  

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However, not all DB plan sponsors find themselves having to increase their contributions. “Organizations that have taken steps to manage their plan’s risk exposure are likely better funded,” said Tom Ault, a vice president with Aon Hewitt in Vancouver. “Depending on the plan and the approach adopted, sponsors may find that their solvency ratio has dropped by considerably less than 15% in the last year.”   

Aon Hewitt suggests an action plan for DB sponsors that includes taking less risk by investing more in bonds and less in equities, having a better match between bond and liability duration and adopting a less-risk/long bonds approach.  

In addition, organizations should take another look at their pension plan design, funding policy and contribution strategy.

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