Despite recent volatility in capital markets, pension funded ratios in Canada have reached their highest levels in more than five years, according to an analysis by Watson Wyatt Worldwide, a leading global consulting firm.

“Canadian pension plans have not been this well funded since April 2002,” saysDavid 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 adds. “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.”

The funded ratio (the ratio of plan assets to plan liabilities) of the typical pension plan has climbed to 105% 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% at the end of September 2006.

Improvement in 2006 was driven by a combination of strong investment returns and rising interest rates, but the improvement in 2007 has been driven primarily by higher interest rates, Watson Wyatt says.

It adds that market returns have not been a measurable help. “Aggressively invested funds 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, fast approaching, the consolidation of earlier improvements will undoubtedly be a comfort to many sponsors, Watson Wyatt notes

“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 says.