Canadian pension funds are suffering losses of at least 10%, consultants estimate, following the sharp declines in equity markets worldwide.
"The declines in the equity markets will have a significant impact on Canadian pension funds," said Donald Smith, a partner in Western Compensation & Benefits Consultants, Vancouver.
"Companies will see their surpluses go down and, at pension plans where the employers took contribution holidays for years, they will have to start making contributions again," he added.
"A lot of companies used the surpluses to take contribution holidays," agreed Patrick Walsh, a consultant with SEI Inc., Toronto. "If they were on a contribution holiday for years and have to start making contributions again, it looks bad (for the bottom line)."
Change in plans
That's what happened at the C$33 billion (US$21 billion) Ontario Municipal Employees' Retirement System, Toronto. Not only did the fund have to put off plans to increase pensioners' benefits, but employers and employees will have to start making contributions to the fund again by the middle of next year.
Dale Richmond, chief executive officer of OMERS, said, "We had to make a midcourse correction." The plan to increase benefits had first been proposed 18 months ago, when the fund had been running a 20% surplus due to the soaring stock markets of the late 1990s. The fund had been on a contribution holiday since August 1998.
By the time the proposal to increase benefits worked its way through the various committees to the provincial government for legislative approval, the equity markets had suffered a downturn and the surplus was eroding.
The legislation was due to take effect in early September, but then the terrorist attacks of Sept. 11 took place "We decided to defer the improvements in benefits until things became less volatile and more certain," explained Mr. Richmond.
"There's disappointment because the benefits didn't increase, but we realized we shouldn't do anything to jeopardize existing benefits," said Mr. Richmond.
He said contributions will need start again next year because, while the surplus is still at 20% now, that is likely to decrease by the end of the year.
"We have the strength to withstand downturns, but we want to make sure the surplus is not depleted," he said.
"We deferred the benefit increase and we're going to start contributions earlier than anticipated - by the middle of next year," said Mr. Richmond. He added that the fund made the announcement about new contributions now because "we wanted to give everyone who was doing their budgets for next year notice now."
"Rates of return are well below what many pension funds need to meet their obligations," said Perry Teperson, an actuary and consultant with James P. Marshall Inc., Vancouver, Hewitt Associates' investment consulting unit in Canada. "Companies are behind the eight ball no matter which way you cut it."
"Both employees and employers may have to start making contributions to their plans again, depending on what they did with the surpluses of the late 1990s," said Mr. Teperson.
He said the nosedive taken by the equity markets in 2001 was "a wakeup call and a real shock to some clients."
Mr. Teperson pointed out many Canadian pension funds "have less money invested in equities than U.S. pension funds." He said the typical Canadian pension fund has 55% to 60% of its assets in equities. He thinks many U.S. plans have 65% to 70% of assets invested in equities.
The Ontario Teachers Pension Plan, Toronto, now has about 60% of its fund in equities, down from a high of about 75% when the equity markets were soaring. The fund is down about 8% for the year.
Leo de Bever, vice president of research at the plan, said it has benefited from active equity management. The C$73 billion fund has had a return of almost 4% so far this year on its actively managed equity assets, about the same as last year.
He declined to specify the amount of actively invested equities is but explained that the fund determines how much money to actively manage by thinking of it in terms of risk. Basically, he said, "on a stand-alone basis we're ready to risk 5% of the fund in active management, in terms of the losses we might incur."
Private firms, too
Private companies also could have problems with their pension funds because "companies have to account for pension costs on their balance sheets," said Mr. Teperson. "It could hurt the bottom line of companies because they might have to take a hit on pension expense if they have to make contributions to their pension funds again."
Noranda Inc., Toronto, is in a better position than many other private companies now because its C$1 billion pension fund runs its asset mix based on its liability structure, according to Tom Phelps, vice president and chief economist at the firm.
"We have a higher bond weighting and a longer duration because we are liability oriented, and we've done well with our liabilities," he said.
The pension fund has 55% of its assets in equities and the rest in bonds. Although its equity investments are down about 10% to 12% this year, it has had a 5% positive return on its bond portfolio, so the fund's assets are down about 7.5% so far this year, according to Mr. Phelps.
"It could be a lot worse," he said. "I feel quite comfortable with an asset mix that's liability driven rather than market driven. It's paid off in spades."
Noranda's pension fund has been on a contribution holiday for the past few years, but that will be reviewed at the end of the year, said Mr. Phelps.
Damon Williams, a consultant with Aon Consulting, Vancouver, said Canadian pension funds have actuarial evaluations every three years and noted that long-term interest rates, which are matched with liabilities, are higher today in Canada than they were three years ago.
"The two previous years were very strong as well. If a pension plan is doing an evaluation today, it won't be that different from three years ago," said Mr. Williams.
But he added that if long-term interest rates start to decline the way short-term interest rates have, that could have an impact on liabilities.
Jim Franks, a consultant with Frank Russell Canada, Toronto, noted there are "built in cushions to mitigate the squeeze." The actuarial value of assets are "smoothed" over a three- to four-year time period, which would give pension funds time to handle the problem. Moreover, if a pension fund goes from having a surplus to having a deficit and becomes underfunded, companies can spread out the funding of the plan over a 15-year period, he said.
While he thinks "there are reasons to be concerned, the situation (with pension funds) is not as bad as it looks at first glance," said Mr. Franks.