Canadian public companies are increasing the discount rates they use for their defined benefit pension plans, according to a new survey by Morneau Shepell Ltd.
The survey of 90 Canadian public companies found the median discount rate — the interest rate the pension plan uses to determine the current value of its anticipated future benefits — was 3.8 per cent as of Dec. 31, 2018, compared to 3.5 per cent the previous year. It also found 99 per cent of respondents had increased their discount rate in 2018.
Roughly 87 per cent of surveyed companies used a discount rate that fell between 3.5 and four per cent in December 2018, compared to the end of the previous year, when 83 per cent of companies’ discount rates were between 3.25 and 3.5 per cent.
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The surveyed companies had a 95 per cent overall ratio of pension assets to DB obligations for accounting purposes, with 20 per cent of respondents 100 per cent funded or higher, 34 per cent between 90 and 99.99 per cent, 33 per cent between 80 and 89.99 per cent and just 13 per cent with a funded status between 79.99 per cent.
The survey also found the median discount rate for non-pension benefits was 3.8 per cent as of Dec. 31, 2018, identical to the pension rate. More than half (55 per cent) of respondents used similar discount rates for their pension and non-pension benefits, while 45 per cent used a significantly different discount rate for the two benefits.
Pension plans that provide pay-related benefits also must make an assumption about the rate of compensation increases, which reflect inflation, seniority, promotions and factors such as employment market supply and demand. According to the survey, the median compensation increase assumption was three per cent in 2018, the same as 2017, with 79 per cent of companies surveyed using rates that fell between 2.5 and 3.5 per cent.
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“In some cases, however, this assumption is much lower than the median, leading one to question whether some companies are properly reflecting the impact of individual job progression in their disclosed assumption,” the report said.
It also found the median spread between the discount rate and the rate of compensation increase was 0.75 per cent at the end of 2018, 25 basis points higher than last year. This is notable because that spread can significantly effect a plan’s DB obligation, with an increase in the spread creating a lower obligation.
The plans’ asset allocations shifted slightly away from equities year-over-year, according to the survey. At the end of 2018, on average, 39 per cent of plans’ assets were in equities, 49 per cent in fixed income and 12 per cent were allocated to other assets. In comparison, at the end of 2017, an average of 43 per cent of plans’ assets were invested in equities, 46 per cent in fixed income and 11 per cent in other assets.
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