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.

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“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.

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“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.”

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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.