Under-funding remains the most pressing problem facing Canadian pension funds, according to new research from Greenwich Associates.

Total assets of the largest Canadian institutions — including corporate, public and provincial pensions, endowments and foundations — increased by 20% from 2003 to 2004, Greenwich reports. It attributes the gains to strong market returns. “Thanks in large part to this asset growth, the funding positions of Canadian pension funds improved to a point at which the typical Canadian pension fund is now close to being fully funded,” it says. The average funding ratio of Canadian plans increased from 95% in 2003 to 97% in 2004.

“It is important to note, however, that several of Canada’s largest pension funds are still seriously under-funded, so as an industry, Canadian funds are not yet out from under this burden,” says Greenwich Associates consultant Rodger Smith. “Indeed, when asked to name the most pressing issue facing their funds, almost 40% of plan sponsors in 2005 cite the under-funding situation.”

The elimination of the Foreign Property Rule also stands front and center in the minds of Canadian fund officials, Greenwich says. Its research revealed that a quarter of Canadian plan sponsors plan to increase their allocations to foreign investments and another 30% are considering such a move.

Currently, they have an average of 30% of their assets in foreign equities, 3% in foreign fixed income and 2% in non-domestic alternative investments. After the rule removal, the group of plan sponsors in the study intends to increase foreign equity allocations by 13%, non-domestic alternatives by 50%, and foreign fixed-income allocations by almost 70%. “The most significant change to Canadian institutional asset mixes in coming months will almost certainly be a shift out of domestic equities and into foreign investments,” says Greenwich consultant Lea Hansen.

It also reports that domestic equities, which represented 30% of institutional assets as recently as 2000, fell from 27% of assets in 2003 to 24% in 2004. More than 35% of Canadian plan sponsors say they will decrease their allocations to active domestic equities by 2007, while less than 15% expect to increase them. For passive domestic equities, 13% expect a decrease and only 4% an increase.

“If Canadian pension plan sponsors in years past have been slow to address some of the challenges facing their funds, their inability to improve funding ratios has probably now brought them to the point of action,” says Greenwich Associates consultant Lea Hansen. “With that motivation, and the recent elimination of the limitations on foreign holdings, Canadian plan sponsors in 2005 can be seen as having something of a blank slate.”

Greenwich also found that only 20% of Canadian plan sponsors have closed their defined benefit plans to new employees, and just 3% say they intend to do so over the next two to three years. By way of comparison, almost half of UK defined benefit plans are now closed to new employees.

“Canadian plan sponsors do not appear to be following in the footsteps of their counterparts in the United Kingdom, where plan sponsors on a wide scale are closing their defined benefit plans to new employees and shifting to defined contribution structures,” says Smith. “Instead, Canadian funds seem to be rolling up their sleeves and saying, ‘bridging the funding gap is a challenging task, but we are committed to our defined benefit plans and we are ready to do the work necessary to preserve them.’”