Ratings Agency Finds Dire Environment for Pensions

August 23, 2012 (PLANSPONSOR.com) - An analysis of pension plans in Canada and the U.S. shows ever increasing funding deficits.

DBRS’ “2012 Pension Study: Discounting into the Danger Zone” found only 46.6% of the 451 plans it reviewed are at least 80% funded, the amount considered to be in relatively good shape. The funding deficit for the plans reviewed was $389 billion.  

Plan assets dropped significantly during the 2008 economic crisis and have staged only a modest recovery since then, according to the report. This recovery was due to large contributions by employers and positive asset performance post-crisis. As a result of the decline in interest rates, discount rates dropped by approximately 143 basis points over the past four years and pension obligations hit an all-time high in 2011, contributing to the current pension deficit.  

Annual employer contributions are at all-time highs due to regulator reforms which require ongoing funding. Employer contributions make up 4% of total obligations annually. DBRS expects this level of funding to continue for at least the next three years.  

Since 2000, demographic factors have affected pension plan funding. As Baby Boomers approach retirement age, a smaller number of employees are supporting a greater number of retirees. The increase in benefits paid may put additional pressure on pension plans. Furthermore, longer life expectancies will adversely affect the funded status of pensions.  

Based on its analysis, DBRS revised its previously optimistic outlook of pension funding and does not expect full funding to be achievable until 2014 at best. Moreover, DBRS expects defined benefit plans will be slowly unwound and removed over the next 40 years.  

The study report can be accessed at http://www.dbrs.com.  A registration is required.