Pension plans are in better shape than they were last year, especially those based in Canada.
A review of 450 pension plans worldwide in a DBRS report, Pension Plans: Vital Signs Improving, shows that the aggregate funded status climbed out of the danger zone to 88.4% in 2013, the highest level since the 2008 financial crisis. This reversal stands in stark contrast to 2012, when the aggregate pension deficit fell slightly into the danger zone (78%). DBRS defines the danger zone as a funded status of less than 80%.
“Much of this sharp rise is attributable to above average asset returns coupled with heightened discount rates,” states the report. “As economic recovery continues, it is reasonable to assume that the funded status will remain above the danger zone in the coming year.”
In Canada, the funded status of plans rose to 94.7% from 84.4% in 2012.
Based on current trends, and assuming no market crash, DBRS predicts the health of DB plans will continue to improve over the long term for the following reasons:
- interest rates are likely to eventually rise as stimulus initiatives subside;
- companies have maintained strong balance sheets, which improve their ability to make contributions;
- the evolution of regulatory changes requires companies to eliminate plan deficits over the long term; and
- the relative size of a company’s obligation should gradually fall as fewer employees are added to the plans because of a shift to DC, outsourcing and/or reduced labour requirements.
The study is based on a review of 450 DB plans in Canada, the U.S., Japan and Europe. It includes 363 American plans, 64 Canadian plans and 23 international plans.
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