The combined effects of poor investment returns and decreasing interest rates led to a tough 2011, according to data from the Towers Watson DB Pension Index. The index tracks the performance of a hypothetical typical DB plan started in 2001 with a balanced investment portfolio of 60% Canadian and foreign stocks and 40% bonds.
Based on 2011 investment performances and interest rates, the index fell 16.2% over the course of the year, sending the plan’s funded status to 72% at the end of December from 86% in January. Towers Watson indicates that the typical 60/40 asset allocation to stocks and bonds would have generated only 0.5% returns over 2011, while pension plan liabilities would have increased by close to 20% due to the decline in interest rates over the same period.
Ian Markham, Canadian retirement innovation leader with Towers Watson, said DB plans would continue to weigh on the financial health of the organizations that have made such commitments. “DB plan sponsors will continue to feel the impact of the double whammy we experienced in 2011—a combination of declining long-term interest rates and poor equity market performance. For many organizations, these conditions have resulted in larger plan deficits at the end of 2011 and will lead to higher pension costs in 2012 and beyond,” he said.
Roland Pratte, a senior investment consultant with the firm, said DB plan sponsors should continue to manage their pension fund risks through investment and plan design, and to pay close attention to ongoing funding strategies.