Managing Risk Should Remain a Priority
TORONTO, Oct. 23 /CNW/ - Despite recent volatility in capital markets,
pension funded ratios have reached their highest levels in more than five
years, according to an analysis by Watson Wyatt Worldwide, a leading global
"Canadian pension plans have not been this well funded since April 2002,"
said David Burke, retirement practice director of Watson Wyatt's Canadian
offices. "And while this is good news, cost volatility is still with us."
"It remains essential not to forget risks," Burke continued. "Market
swings or interest rate shifts could quickly change the picture, and deficits
and requirements for burdensome special contributions could return. At this
point in time, though, there may be a significant opportunity for some plan
sponsors to reduce future risk, without having to lock in huge deficits and
significant special contributions."
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The funded ratio (the ratio of plan assets to plan liabilities) of the
typical pension plan has climbed to 105 per cent at the end of September 2007,
on a Generally Accepted Accounting Principles (GAAP) basis. The funded ratio
of the typical plan is up from 89 per cent at the end of September 2006.
Whereas the improvement in 2006 was driven by a combination of strong
investment returns and rising interest rates, the improvement in 2007 has been
driven primarily by higher interest rates. Market returns have not been a
measurable help. Aggressively invested funds (i.e., those with a higher
commitment to equities) have fared only marginally better than more
conservatively invested funds this year, and, although the typical balanced
fund has seen a positive return year to date in 2007, this return has fallen
short of the expected return built into the liability calculations.
With December 31 - the key budget planning date for many organizations -
fast approaching, the consolidation of earlier improvements will undoubtedly
be a comfort to many sponsors.
"The typical plan has now developed a small cushion against future
adverse experience. Given improved funding ratios and the recent market
conditions, some sponsors will now find it more palatable to move to a more
conservative investment strategy," Burke said.
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 31 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% US & 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, Nicole Leaver, Cohn & Wolfe, (416)
924-5700, firstname.lastname@example.org, email@example.com