Pension funded ratios have reached their highest levels since 2002 as conditions for Canadian pension plans steadily improve, according to Watson Wyatt Worldwide.

For a typical pension plan, the pension funded ratio has increased to 102% at the end of the second quarter of 2007, up from 86% at the beginning of 2006, on a GAAP basis.

While the stock markets have been volatile, significant increases in bond yields and large contributions towards earlier plan deficits are the major reasons for the improvement.

“This news provides a welcome respite from the last few years, when most pension plans had deficits,” says David Burke, retirement practice director of Watson Wyatt’s Canadian offices.

“Now, plan sponsors not only expect next year’s budgeted pension expenditures to be lower, but it looks likely that the markets will help the cash side of their business operations. We are now moving back towards a world of pension surpluses.”

However, it is essential not to forget risk and the impact of interest rate movements, Burke warns. Market swings could quickly make pension costs volatile once again, and plan sponsors need to take a long-term view rather than overreacting to short-term fluctuations.

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