The Office of the Superintendent of Financial Institutions reports that 72% of defined benefit pension plans are less than fully funded according to the latest data.

In a statement issued today, Julie Dickson, assistant superintendent, regulation sector, at OSFI, said that based on June values, “the results show a marked deterioration in the average estimated solvency ratio, or ESR, of federal plans”. OSFI’s latest test shows that the average ESR fell from 1.00 in December 2004 to 0.91 in June, she reports. The results also show that an estimated 72% of federal defined benefit plans were less than fully funded in June, compared to 53% in December.

“Although this estimated number is high, it is important not to overreact,” she stressed, noting that while 72% of DB plans were under funded, on average the funding shortfall is less than 10%. “Thus, the situation can still be described as stable but fragile, but with heightened vigilance being warranted, especially in cases where the funding shortfall is significantly more than 10%.”

Dickson added that the June ESR results also show that the estimated aggregate solvency deficit of all federal plans in a deficit position is approximately $12 billion — up from an estimated $4 billion in December 2004.

OSFI adds that these results suggest that “many defined benefit pension plans will face, and need to prepare for, higher solvency funding requirements in 2006.”

There are currently 83 pension plans on OSFI’s watch list; 50 defined benefit plans and 33 defined contribution. “This is only slightly different from six months ago, but we will likely see a number of new plans added to the watch list in the coming months,” she suggested.

Dickson explained that the drop in the ESR between December of last year and June was the combination of three main factors: lower long-term interest rates lowered the average ESR by approximately five percentage points, strong equity market performance made a positive contribution of about three percentage points, a change in actuarial methods introduced by the actuarial profession in February 2005 lowered the average by approximately seven percentage points.

“Excluding the impact of the new actuarial standard for a moment, the results point to a slight deterioration in the solvency position of federal defined benefit pension plans as a whole,” she said. “This is consistent with the kind of narrow movement we’ve seen for the last couple of years.”

However she noted that the impact of the new actuarial standard cannot be ignored, and that it will have a very real impact on individual plans’ solvency ratios in the future.

She added that the expected deterioration in many plans’ financial position brought on by changes in financial and economic variables requires heightened vigilance. She said that pension plans need to focus on the impact of the low interest rate environment and new actuarial standards, which reflect market rates as well as the fact that mortality studies show that people are living longer. That plans shouldn’t bet on favourable market outcomes saving their solvency. In this environment, disclosure to plan members is key, she said.

Also, she noted that OSFI will continue to exercise its authority to ensure compliance with pension legislation and regulations. And, that it is prepared to continue working with plan sponsors and members to find reasonable solutions.