Canadian corporate defined benefit pension plans' funded status eroded in 2011 as liabilities grossly outpaced meager investment returns, according to a report on Towers Watson's DB Pension Index issued Wednesday.
Poor investment returns and decreasing interest rates caused the DB Pension Index to fall 16.2% last year. The typical DB plan, based on companies tracked by Towers Watson, is forecast to have a median funded status of 72% as of Dec. 31, down from 86% at the start of 2011, barring any additional contributions.
Canadian law requires deficits to be funded over a five-year period.
Ian Markham, senior actuary and Canadian retirement innovation leader at Towers Watson, said he expects funding levels to remain the same in early 2012.
“The general view is that long-bond yields have to go up again, so we will see funding ratios improve again,” Mr. Markham said in a telephone interview. But “it's difficult to see great optimism on the immediate horizon.”
Corporations are taking two actions to deal with low pension funding levels, Mr. Markham said — derisking strategies and moving to defined contribution plans from DB plans.
The Towers Watson DB Pension Index tracks the performance of a hypothetical corporate DB plan that was fully funded in the plan sponsor's financial statements at the end of 2000. The typical allocation of 60% stocks and 40% bonds used for the index would have generated only a 0.5% return in 2011 while plan liabilities would have increased by about 20% because of declining interest rates.
