Pensions in a funding crisis: Survey

By Mark Noble | April 20, 2009 | Last updated on April 20, 2009
3 min read

The financial crisis has raised concerns among Canadian executives about both defined benefit (DB) and defined contribution (DC) pension plans, according to Watson Wyatt’s sixth annual Survey of Pension Risk.

The survey of 161 chief financial officers and vice-presidents of human resources reveals finds 88% of respondents believe DB plans are in a widespread funding crisis.

The majority of respondents do not see the current funding shortfall issues as temporary. Slightly more than a third of respondents viewed funding shortfalls as cyclical, while 53% think the crisis will be long-lasting. Watson Wyatt says these results represent a significant shift from last year, when only 34% of survey respondents said Canada was facing a long-lasting pension crisis.

“Drastic stock market declines have had a profound impact on the private pension landscape,” says Ian Markham, director of pension innovation for Watson Wyatt’s Canadian offices. “Without temporary funding relief, large, required pension contributions will limit plan sponsors’ ability to make critical investments in their businesses. This could have a domino effect on the Canadian economy — reducing demand for other companies’ goods and services and hindering job growth.”

Three-quarters of corporate DB plan sponsors said that without government funding relief, they would be forced to make large or moderate reductions to their capital spending.

Despite these challenges, the number of DB plan sponsors looking to convert to a DC format has remained roughly the same. Forty-one per cent say they have no intention of converting their DB pension schemes to DC plans, compared with last year’s 42%.

Preference on government funding relief
Least helpful Somewhat helpful Most helpful
Longer amortization period for solvency deficits (e.g. 10 years) without needing a letter of credit and/or member consent 2% 9% 88%
Increasing the actuarial discount rate for solvency valuations 24% 29% 47%
Longer amortization period for solvency deficits (e.g. 10 years) for plans that obtain a letter of credit and/or member consent 48% 25% 27%
Temporary suspension (e.g. 12 months) of the requirement to file valuations with the regulator 46% 27% 27%
Source: Watson Wyatt Worldwide

In addition, plan sponsors seem to be avoiding a shift to more conservative investment strategies. Increasing bond weighting and lengthening bond duration are popular strategies to stabilize costs, Watson Wyatt notes, but the firm has not seen a substantial movement away from equities and other growth assets.

“Sizable funding deficits are prompting many DB plan sponsors to rethink their risk appetite and investment strategies,” says Janet Rabovsky, investment consulting leader for Watson Wyatt’s central Canadian offices. “When the dust settles, we could see a number of companies move to more conservative investment strategies.”

Low contributions and poor investment returns are the most serious threat to the long-term sustainability of DC plans, according to the survey. Yet, most DC plan sponsors do not believe it is their responsibility to establish certain income replacement target for their plan members.

Top threats to long-term sustainability of DB plans
Severity compared to last year
Less Unchanged More
Cost of maintaining / funding DB plans 1% 19% 81%
Volatility of future funding contributions 0% 17% 83%
Imbalance between funding risk and reward (assymetry) 2% 44% 54%
Volatility of accounting pension expense 1% 32% 67%
Source: Watson Wyatt Worldwide

An overwhelming majority (90%) of respondents expect their employer contribution levels to remain unchanged in the next three years.

“The threat of workers having insufficient savings to retire has become more acute since the financial crisis began,” says David Burke, Watson Wyatt’s Canadian retirement practice director. “Employees who cannot afford to retire can pose a significant challenge for plan sponsors that are trying to streamline their operations to survive the current recession. This is particularly true for sponsors of DC plans.”


Mark Noble