The largest Canadian pension plans saw their combined liabilities increase from $154 billion to $179 billion and their overall financial health decline in 2014, finds a report by Russell Investments Canada.
“Market risk and longevity risk continued to be the two biggest risks to defined benefit pension plans last year,” says Kendra Kaake, a senior investment strategist with Russell Investments and author of the report, which analyzed financial data for 25 Canadian-listed corporations with pension obligations in excess of $2 billion. The study finds that the continued low interest rate environment and improvements in mortality assumptions were particularly painful for corporate defined benefit plans in 2014.
“Our analysis provides critical insights into what Canadian corporations are doing and how those actions are impacting their funded status,” explains Kaake. “Although these plans had a very good year on the asset side of the equation, with assets increasing some $14 billion in aggregate, they also saw their combined liabilities spike by a combined $25 billion. That means a $5 billion deficit in 2013 became a $16 billion deficit in 2014—a 300% increase in the size of the shortfall.”
Additional findings include:
- a net decrease in the financial health of the group of 25 companies, with funded status decreasing from 97% in 2013 to 91% in 2014;
- approximately 90% of corporations adopted new mortality assumptions, resulting in a $6 billion impact for those companies – an increase in liabilities of 3% to 4%;
- unfunded defined benefit obligation (DBO) as a percentage of corporate market capitalization increased from 0.4% to 1.5% (median);
- unfunded DBO as a percentage of cash flow to operations (CFO) increased from 2.4% to 10% (median); and
- the impact of changes in interest rates in 2014 was significant, with the median discount rate falling from 4.7% to 4.0% and the mean discount rate falling by 0.5%. The net impact was an $18 billion increase in liabilities.
Kaake says that in light of the challenging financial climate, many plan sponsors continue to pursue de-risking solutions to lower the volatility of short-term movements in their plans’ surpluses or deficits, including strategies for reducing their exposure to longevity risk.