The low interest rate environment has undermined hopes that defined benefit pension plans could erase their funding deficits sooner rather than later, according to a new study from DBRS Ltd.
The rating agency says that its review of 451 Canadian and American defined benefit plans finds that the funding deficit has ballooned to $389 billion. “In order for companies to address this funding gap, employers will have to maintain high levels of contributions, as many plans have now entered the danger zone of funded status,” it says.
While DBRS acknowledges that there is no magic number for adequate funding, it uses 80% as a reasonable funding threshold. And, it reports that, based on this threshold, more than two-thirds of plans reviewed this past year were underfunded by a significant margin.
“This increasing inability to fund pension plans was primarily due to a sharp decline in discount rates. These low discount rates reflect a low interest rate environment which is expected to remain in place for the near future,” it says. “Based on this pension environment, DBRS has revised its previously optimistic outlook on pension funding and does not expect full funding to be achievable until 2014 at best.”
Additionally, DBRS says that it expects that defined-benefit plans will be slowly unwound and removed over the next 40 years. “These plans are difficult to manage and they are overly burdensome,” says James Jung, senior vice president at DBRS. “We’re seeing fewer companies offering defined benefits to new employees.”