The financial health of federally regulated private pension plans has improved, according to new solvency ratio estimates released by the Office of the Superintendent of Financial Institutions.

The average solvency ration of defined benefit(DB)plans was 1.06 at December 2006, meaning the total value of assets of all plans was 6% higher than liabilities, calculated on a solvency basis.

While the situation of individual pension plans varies considerably, the overall number is a marked improvement from the end of 2005 when there was an average shortfall of some 10%.

“We attribute these improved results primarily to strong investment returns in the second half of the year, slightly higher bond yields and to special payments that are required by pension legislation,” says acting superintendent Julie Dickson.

The December 2006 estimates also show that about half of all DB plans are now fully funded, compared to only about a quarter one year earlier. And among the underfunded plans, the degree of underfunding is more moderate. Only 19% of plans have an estimated solvency ratio of below 0.90, with 4% of plans below 0.80.

Despite these positive results, she says plan sponsors and administrators need to stay on alert.

“Pension plan sponsors and administrators must continue to be vigilant and knowledgeable about techniques to manage the potential risk volatility can pose to benefit security and funding requirements,” Dickson says. “It would be wise for plans to ensure their investment strategies are matched with their risk tolerances as the situation could change very quickly if the equity market slips or bond yields fall.”

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