Canadian pension plans have been hit hard by the global financial crisis, with solvency ratios — the ratio of the market value of plan assets to plan solvency liabilities — plunging precipitously.

According to the Pension Barometer, published by pension consultants Watson Wyatt Canada, the funded status of the typical pension plan dropped to 69% at the end of 2008 from 96% at the beginning of the year. It fell by 11 percentage points in the fourth quarter alone, the Pension Barometer says.

Pension regulators allow plan sponsors to make up funding shortfalls in their pension plans over a period of several years. But that means companies may be struggling to make up pension funding at the same time as they’re facing tough economic times.

“What’s most troubling,” says David Burke, retirement practice director of Watson Wyatt’s Canadian offices in Toronto, “is that the significantly higher pension contributions that will be required to offset sizable investment losses are placing additional strain on companies and negatively affecting corporate capital investment plans for 2009 and beyond.”

As a result, there’s increasing pressure for amortization periods to be extended to ease the pressure on plan sponsors. In last fall’s economic update, for instance, federal Finance Minister Jim Flaherty said the amortization period for federally regulated pensions will be extended to 10 years from five.

But for workers worried about their pensions, the news may not be all bad. Sponsors of defined-benefit pension plans must continue to pay the promised pensions while making up their funding shortfalls. “Members of DB plans,” says Burke, “will be at risk only if the company does not survive long enough to fully fund the plan.” (The sponsor of a DB plan guarantees the plan member a retirement pension related to earnings and years of service.)

The best form of benefit security for pension plan members, says Burke, is a healthy employer. But, he cautions, some of the funding relief being proposed by pension regulators and politicians has “imposed conditions that are unrealistic.”

For example, as Dan Morrison, senior retirement and investment consultant in Watson Wyatt’s Calgary office, explains: in some cases, the proposed rules state plan member consent would be required to access the funding relief — a condition that may be difficult to meet if the pension plan sponsor has to contact all plan members, including those who are already retired.

As well, Morrison questions the use of letters of credit, which a financial institution issues to cover some or all of the amount owing, allowing the plan sponsor to postpone shortfall payments temporarily. The use of letters of credit as an alternative means of satisfying solvency payments — now permitted in some jurisdictions, including Quebec, Alberta and British Columbia, and suggested in a recent federal government discussion paper for pension plans under federal jurisdiction — may be problematic, Morrison says, given the current credit crunch, which has made obtaining credit difficult or very expensive.

Members of defined-contribution pension plans have more cause to worry. DC plans don’t guarantee any particular pension. Employer and employee contributions — generally, a percentage of earnings — are deposited in a fund that is invested and used to provide a pension at retirement. Like an RRSP, the amount in the fund — and the eventual pension — depend on investment choices and market performance. The Pension Barometer survey found the value of typical retirement accounts of participants in DC plans dropped by between 10% and 20% in 2008.

Employer-sponsors of DC plans are not required to make up these losses, the Pension Barometer notes. But Morrison suggests those companies are likely to face workforce and other human resources challenges. “As DC plan participants watch their account balances fall,” says Morrison, “their anxiety levels are likely to rise. And with investment losses making retirement less affordable, expected retirements may be deferred or, worse yet, employees may ‘retire on the job,’ struggling to be productive and engaged.”

Plan sponsors that switched to DC plans partly as a way of off-loading investment risk to employees should be aware that there are other risks involved, says Morrison, such as workforce planning issues and human resources policy risks that may be coming to the fore now.

Meanwhile, the federal government is the latest jurisdiction to put forward proposals for changing the rules on pension plans under its jurisdiction. About 7% of all private pension plans in Canada, accounting for approximately 12% of all pension assets, fall under federal laws.

@page_break@In a discussion paper issued in early January, Flaherty outlined a range of proposals to strengthen the legislative and regulatory framework of private pension plans under federal jurisdiction. Among the proposals:

> Allowing pension plans to maintain a larger surplus cushion to protect against market downturns and reduce the risk of funding deficiencies.

> Extending the amortization schedule for funding shortfall payments to 10 years from five, subject to certain conditions.

> Allowing letters of credit as an alternative or complement to solvency funding.

> Possibly eliminating the concept of partial termination but requiring immediate vesting of pension benefits for all members.

> Clarifying the legal uncertainty regarding the ability of sponsors of DC plans to provide investment advice to plan members.

The government paper acknowledges recent attention has been focused on the idea of establishing large, pooled DC arrangements for employers and employees who don’t already have private pension plans, potentially with the involvement of the government. (See story, below.) The feds are asking for comments on the paper to be submitted by mid-March, “with the objective of making permanent changes in 2009.”

Meanwhile, national consultation meetings will begin in March. The federal government will also consult with provinces and territories on pension regulation. To this end, a federal/provincial working group of senior officials has been established to discuss pension issues, says the federal government paper, “which will provide opportunities for information sharing.”

Whether this is a first step toward establishing a single national pension regulator, long advocated by the pension industry, remains to be seen. IE