Source: The Canadian Press

The health of some 400 Canadian defined-benefit plans deteriorated in the first half of the year, the federal pension watchdog said Thursday.

The average solvency ratio for the plans fell to an estimated 87% as of the end of June, according to a semi-annual report from the Office of the Superintendent of Financial Institutions.

That means the plans only had 87 cents worth of assets for every dollar of pension liability at that date, on average.

“The deterioration in the estimated ratio was largely due to weak pension fund returns during the first half of the year,” said Judy Cameron, Managing Director of OSFI’s private pension plans division.

“Since June 30th, market conditions have remained volatile. Although pension fund returns have improved, there has been a substantial decline in long-term interest rates.”

Equity markets and long-term interest rates have huge impacts on fund assets and their solvency ratios, which measure a pension plan’s financial health, although they have no direct effect on current payments to pensioners.

However, a separate report released Thursday found that Canadian pension fund assets actually improved in the third quarter — lifted by 7.3% on global market rallies during September, according to a RBC Dexia survey of Canadian pension plans.

“It’s been a bumpy ride, but this quarter’s gains make up for last quarter’s pull back and brings year-to-date totals to a respectable 5.7%,” said Don McDougall, director of advisory services at RBC Dexia.

Cameron suggested pension plans will continue to face difficulty in the coming months and said plan administrators should prepare for the impact of possible changes in investment returns and interest rates.

Theoretically, the plans’ sponsors — usually the employers — are required to make up any shortfall but in some cases the deficits are so large that they endanger the survival of the business.

The federal government has been working on reforms to the legislative and regulatory framework for the private pension plans regulated by OSFI, which doesn’t oversee pensions of companies that fall under provincial jurisdiction.

A number of changes to federal pension legislation and regulations came into effect in July, including new solvency funding requirements.

The federal watchdog says the solvency of the defined-benefit plans it supervises was down three points at mid-year, from 90% at the end of 2009.