Despite recent weakness in the Canadian equity markets, pension plan funded ratios have posted a significant net improvement last year, according Watson Wyatt.

The funded ratio of the typical pension plan has climbed to 106% at the end of December, on a Generally Accepted Accounting Principles (GAAP) corporate accounting basis.

The funded ratio of the typical plan is up from 96% at the end 2006.

“Canadian pension plans have not been in a position to report such high funded ratios since April 2002,” says David Burke, retirement practice director of Watson Wyatt’s Canadian offices. “But while this is good news, this is no time for complacency. Significant cost volatility remains a key influence behind many of the decisions made by pension plan sponsors.”

Equity markets declined in the last few months of 2007, a trend that was further aggravated for the typical fund by the rising Canadian dollar.

At the same time, the yields available on high quality corporate bonds increased, so the downturn in the equity markets did not have the expected effect of depressing funded ratios.

“”This,” says Burke, “illustrates the hazards of basing pension plan liability assessments, measured on a GAAP basis, on point-in-time, mark-to-market pricing of bonds.”

To see a graph of how pension funded ratios have bounced back over the past few years, click here.

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