Canadian Pension Funded Ratios Post Net Improvement in 2007, Watson Wyatt Finds

    - Managing Risk Should Remain a Priority -

    TORONTO, Jan. 10 /CNW/ - Despite the recent pull back in equity markets,
pension plan funded ratios have posted a significant net improvement in 2007,
according to an analysis by Watson Wyatt Worldwide, a leading global
consulting firm.
    The funded ratio (the ratio of plan assets to plan liabilities) of the
typical pension plan has climbed to 106 per cent at the end of December 2007,
on a Generally Accepted Accounting Principles (GAAP) corporate accounting
basis. The funded ratio of the typical plan is up from 96 per cent at the end
of December 2006.
    "Canadian pension plans have not been in a position to report such high
funded ratios since April 2002," said 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."

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    Equity markets drew back in the last few months of 2007, a trend that was
further aggravated for the typical fund by the increasing strength of the
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 illustrates the hazards of basing pension plan liability
assessments, measured on a GAAP basis, on point-in-time, mark-to-market
pricing of bonds," said Burke. "It greatly increases the volatility of
reported liabilities." From 2003 through 2005, falling yields on AA-rated
bonds negated the recovering asset values. In 2007, rising yields on AA-rated
bonds caused funded ratios to rise, despite lackluster investment performance.
These rising yields were driven in part by problems with asset-backed
commercial paper and contrasted to falling yields on Government of Canada
    "It remains essential not to forget risk," Burke continued. Despite the
impression that 2007 was a highly volatile year for equity markets, it was in
fact one of the lower volatility years for pension assets since 1993 based on
month-over-month changes, according to the Watson Wyatt asset index. While the
volatility of the corresponding liability index was greater, even that was
still modest compared to some earlier years. "It's fair to assume that
volatility in funded ratios could even be higher in 2008 and future years than
it was in 2007."
    December 31 is the key budget planning date for many organizations and
the consolidation of earlier improvements will undoubtedly be a comfort to
many sponsors. When measured on a GAAP basis, the typical plan has now
developed a modest cushion against future adverse experience. "Sponsors will
want to consider the attractiveness of investment strategies that better align
the movement of plan assets and liabilities to lower the volatility of both
funded status and costs in an environment that may punish uncertainty," said
Carl Hess, director of Watson Wyatt's investment consulting in North America.

    Additional findings from Watson Wyatt's analysis include:

    -   After Canadian equity markets hit bottom in September 2002, pension
        funding levels broadly remained steady for the next three years.
        There was a significant net improvement in 2006 and, despite the
        recent market pull back, there has been a further net improvement in
    -   In 2007, aggressively invested funds (i.e., those with a higher
        commitment to equities) had returns well below long-term
        expectations. Funds with higher allocations to U.S. equities than
        assumed in the Pension Barometer may not have fared so well. However,
        funds that engaged in various degrees of currency hedging would have
        fared significantly better. More conservatively invested mixed funds
        and bond funds have had higher positive returns, but still below
        long-term expectations.
    -   The mark-to-market value of pensions prescribed for GAAP accounting
        references AA-rated bond yields, whereas the value of pensions
        prescribed for solvency funding (and payment of lump sum benefits to
        plan members) references Government of Canada bond yields plus a
        fixed spread. Normally, these two series of bond yields move up and
        down in tandem, but during the last few months, problems with asset-
        backed commercial paper and other factors have caused the spread
        between the two to widen, even while Government of Canada bond yields
        were declining. This trend to increasing credit spreads has been most
        pronounced for bonds issued by banks and other financial companies,
        the source of most AA-rated corporate bonds in Canada.
    -   With December 2007 yields on Government of Canada bonds similar to
        those available in December 2006, the solvency ratio for a typical
        plan, after rising above 100% in July, August and September, has
        fallen back to 96% at December 31, 2007.(xx)

    (xx) Calculations on assumptions prescribed for solvency reporting, and
         assuming minimum special contribution required towards solvency
         deficiency at beginning of year. Assets invested in a growth
         portfolio (60% equities, 40% bonds); 50% of liabilities are for
         active members and 50% for pensioners.

    About Watson Wyatt Worldwide

    Watson Wyatt (NYSE:   WW) is the trusted business partner to the world's
leading organizations on people and financial issues. The firm's global
services include: managing the cost and effectiveness of employee benefit
programs; developing attraction, retention and reward strategies; providing
strategic and financial advice to insurance and financial services companies;
advising pension plan sponsors and other institutions on optimal investment
strategies; and delivering related technology, outsourcing and data services.
Watson Wyatt has 7,000 associates in 32 countries. In Western Canada, the firm
serves clients from Vancouver and Calgary; in Central Canada from Toronto and
Kitchener-Waterloo; and in Eastern Canada from Montreal. For more information,

    About the Pension Barometer

    The Pension Barometer reflects the combined impact of investment
performance and interest rates on the funded ratio of a typical Canadian
pension plan, measured on a GAAP accounting basis. The liability index changes
are developed for a plan with a 50/50 split between active member and retired
member liabilities. The asset index changes are developed for a plan with 60%
of assets invested in equities (36% Canadian, 12% U.S. & 12% EAFE) and 40% of
assets invested in bonds (35% Universe & 5% Short term). The asset/liability
index is the ratio of the two. No adjustment is made for special contributions
towards funding unfunded liabilities or solvency deficiencies.

For further information:

For further information: Gal Wilder, Cohn & Wolfe, (416) 924-5700 x

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