Canadian pension plans are the healthiest they’ve been in almost a decade after a turnaround this fall left close to half of all plans in a fully funded position, and some discovering they even have a surplus.TonyIaniro/Getty Images/iStockphoto
Canadian pension plans are the healthiest they've been in almost a decade after a turnaround this fall left close to half of all plans in a fully funded position, and some discovering they even have a surplus.
The median pension plan in Canada was 99.5-per-cent funded on a solvency basis as of the end of November, according to pension consulting firm Aon Hewitt, which compiles data on client plans. While consulting firm Mercer Canada said its client plans had a median funded status of 95 per cent as of mid-December, both firms have seen a similar trend of significantly improved health.
Aon said 48 per cent of plans it advises were fully funded or had a surplus at the end of November – a financial position Canada hasn't seen since the past recession took hold. The median funded status of pension plans last hit 100 per cent in 2008, then plunged to a recent low of just 68 per cent by 2012 as interest rates slid and the postcrisis global recovery languished. The median funded status recovered to about 93 per cent by the end of 2016, Aon said.
A further improvement took hold in the summer as global stock markets climbed, and accelerated in the fall as equity markets improved further, especially in the United States and other developed-country markets outside Canada. Those strong investment returns have pushed pension funds into a strong position, despite facing headwinds from lower long-term interest rates in recent months.
"It's certainly quite a turn in fortunes in the last couple of years," said Manuel Monteiro, head of Mercer Canada's financial strategy group.
Toronto lawyer Mitch Frazer, who advises companies on pension issues, says most plan sponsors are not rushing to make decisions on what to do with unexpected surpluses because they are well aware that funding could turn down again quickly if markets weaken, especially since the pension recovery is still so new.
"Right now, I think most people are still thinking about what to do with it because I think there's more of a surprise than anything else," he said. "I think people are happily positive that there's an upswing, but are waiting to see if things stay in that position."
The turnaround has happened so quickly that many companies are still facing requirements to make special cash contributions to their plans to fund significant shortfalls from valuations done in prior years.
Under pension rules, plan sponsors in many provinces, including in Ontario, must do valuations of the funded status of a pension plan at least every three years, and have up to five years after that to cover any funding deficiencies.
Mr. Frazer said pension plans are allowed to redo their valuations any time they choose, even if the three-year time limit has not passed.
Many companies are now planning to file new actuarial reports with regulators to show their plans have little or no shortfall so that they can reduce special payments, which can cost millions of dollars annually, Mr. Frazer said.
"Everyone looks at the funding on an annual basis, and if there's a benefit to filing sooner, everyone files sooner," he said.
After halting special contributions from prior shortfalls, the next big question facing plan sponsors is whether to stop making company contributions to their plans.
So-called contribution holidays are normally allowed when plans have a surplus, but have proved controversial in the past if markets turn downward and plans quickly become significantly underfunded.
William da Silva, Aon Hewitt retirement practice director, said he is not seeing plans rush to take contribution holidays with the recovery still so fresh, but anticipates it may happen more in 2018.
"The clients I've been working with say, 'We've come a long way, we're back on even ground, let's not make the same mistakes as before,'" Mr. da Silva said.
"For the organizations where the employer has full discretion over the amount they put into the plan, I think there's more of a wait-and-see."
For pension plans regulated in Ontario, funding decisions must also take into account new provincial rules expected to take effect next year, allowing companies more leeway to fund shortfalls once plans are at least 85-per-cent funded on a solvency basis.
The province crafted the standards to try to reduce funding volatility and encourage more companies to retain their traditional defined-benefit (DB) pension plans.
However, the new rules will also tighten the ability of plan sponsors to take funding holidays, only allowing companies to halt contributions when plans are 105-per-cent funded on a solvency basis, rather than 100 per cent currently.
Mercer Canada's Mr. Monteiro said the rule changes will reduce pressure on companies to fund deficits. But he said they may also persuade more companies to take investment risks because there is less potential penalty if modest solvency deficits emerge.
"It's almost an incentive to take risk in your plan," he said.
The toughest decision for pension-plan sponsors will be whether to use surpluses to improve pension benefits for employees, which has been rare in Canada for more than a decade and is typically done when surpluses are particularly large.
Mr. Frazer said he isn't sure many companies will move quickly to make such a costly decision.
"I think the biggest thing is that people are trying to see if this a one-year thing, or is this a permanent thing," he said.