Health of 25 largest Canadian DB plans declines

The largest Canadian pension plans saw their combined liabilities increase to $179 billion from $154 billion and their overall financial health decline in 2014, a report finds.

Russell Investments Canada’s report, Enterprise Risk in Canada, analyzed financial data for what it refers to as the $2 Billion Club—25 Canadian listed corporations with pension obligations in excess of $2 billion. The study concludes that the continued low interest rate environment and improvements in mortality assumptions were particularly painful for corporate DB plans in 2014.

Read: Pension plans’ funded status dips

“Although these plans had a very good year on the asset side of the equation, with assets increasing some $14 billion in aggregate, they also saw their combined liabilities spike by a combined $25 billion,” says Kendra Kaake, a senior investment strategist with Russell Investments and author of the report. “That means a $5 billion deficit in 2013 became a $16 billion deficit in 2014—a 300% increase in the size of the shortfall.”

Key findings of the report also show:

  • a net decrease in the financial health of the group of 25 companies, with funded status decreas-ing from 97% in 2013 to 91% in 2014;
  • approximately 90% of corporations in the $2 Billion Club adopted new mortality assumptions (CPM-2014 tables published by the Canadian Institute of Actuaries) resulting in a $6 billion impact for those companies—an increase in liabilities of 3% to 4%;
  • unfunded DB obligation (DBO) as a percentage of corporate market capitalization increased from 0.4% to 1.5% (median);
  • unfunded DBO as a percentage of cash flow to operations (CFO) increased from 2.4% to 10% (median); and
  • the impact of changes in interest rates in 2014 was significant, with the median discount rate falling from 4.7% to 4.0% and the mean discount rate falling by 0.5%. The net impact was an $18 billion increase in liabilities.

Read: 2014 Top 100 Pension Funds Report: Celebrate good times

Kaake says that in light of the challenging financial climate, many plan sponsors continue to pursue de-risking solutions to lower the volatility of short-term movements in their plans’ surpluses or deficits, including strategies for reducing their exposure to longevity risk.

“Notably, one member of the $2 Billion Club, BCE Inc., announced plans in early 2015 to transfer a por-tion of pension-related liability risk to an insurance company through a longevity insurance swap,” she adds. “We expect pensions to continue seeking ways to reduce risk, and it’s more important than ever for plan sponsors to understand their exposures and align investment strategies with the goals and objectives of the broader organization.”

Read: Pension de-risking trend continues