These are tough times for Canadian pension plans. The quarter ended Sept. 30 was the worst three-month period in the past decade for the financial health of pension plans in Canada, say reports from Mercer LLC and RBC Dexia Investor Services.

But while certain plan sponsors and planholders may suffer in the short term, these analysts say, the pension system should recover over time.

Tanking stock markets drove Mercer’s pension health index down to 72% from 77%. When the global consulting firm launched the index in January 1999, it was pegged at 100%.

That means companies and pension fund sponsors face the possibility of having to make significant cash contributions to their pension plans starting in 2009, says Paul Forestell, retirement professional leader with Toronto-based Mercer. What’s worse, October’s turbulent market performance has driven the index down by another two to three points.

“If it continues to drop,” Forestell says, “it could push more companies into significant financial issues.”

Don McDougall, director of advisory services for Toronto-based RBC Dexia, agrees. Canadian pension plans fell by 8.6% in value in the third quarter of 2008 and by 10.1% over the nine months.

“It hasn’t been pretty,” McDougall says, “and judging by the performance in October so far, the situation is not getting any better.”

Canadian equities was the hardest-hit asset class, plunging by 18.2%, RBC Dexia says, as commodities prices dragged the resources-heavy S&P/TSX composite index to its lowest quarterly result since September 1998. Energy stocks lost 28.3% in the third quarter, while materials dropped by 33.6%.

Most pension plans aren’t required to adjust their funding until January 2009, Forestell says, and much will depend on the market’s performance during what’s left of 2008.

“Most plans assume they’ll earn 7% on their assets. But even if they do that from now until the end of December, they’re locked into the funded position,” Forestell says. “That won’t help them dig out of the hole; they’ll have to earn significantly more than that.

“It’s like running in place,” he continues. “It won’t get any worse, but it won’t get any better. The pension plans need to have excess returns.”

The only positive in the third-quarter results, Forestell says, is that increasing corporate bond yields will make financial reporting look better than it might have.

Come January, companies are facing a potential triple whammy, as they will have to increase the cash requirements for their plans at the same time as lenders are increasingly reluctant to part with capital. If an international, U.S. or Canadian recession hits, the underlying businesses will be hit hard, too.

Steve Bonnar, principal with Towers Perrin, a global human resources consulting firm based in Toronto, says the looming pension plan requirements will force many companies to make some difficult choices.

“Money has to go into the pension plan,” Bonnar says. “Will companies have enough money on hand? Will they be able to raise enough through borrowing, or will they have to take money away from other projects? The extent to which they have to do that will have an adverse effect on those companies and the economy as a whole. If you suck money out of a business, it’s not going to be growing.”

Forestell agrees: “It will be a very challenging time for plan sponsors and companies. They have to look to government to make regulatory changes on how fast they have to fund this, or they’re going to have to look at more extreme measures, such as cutting benefits.”

Bonnar is confident organizations will find the money: “The question is whether it will have a big or small effect on the rest of the business.”

About 20% of Canadians are covered by corporate defined-benefit plans. The majority of the population is funding retirement on their own, mostly through RRSPs — and suffering the losses directly.

“People who are members of DB pension plans should be extremely happy,” Bonnar says. “They’re not on the hook for this downturn; their employer is. Their pensions really aren’t affected.”

Greg Hurst, principal of Van-couver-based Morneau Sobeco Income Fund, a defined-contribution pension consulting firm, says the pension problems do not extend to the Canada Pension Plan, which is backed by the federal government.

“People needn’t panic about CPP, and they shouldn’t panic about private pensions at this point, either,” Hurst says, adding that Canada’s regulatory system does a good job of ensuring there is adequate funding for these plans. The only time a DB plan is in danger of not meeting its promises, he says, is when the company goes bankrupt or the plan is not adequately funded.

@page_break@According to Morneau Sobeco’s latest “60-second survey,” plan sponsors are remaining calm despite the current market instability. Of the 93 responses to the survey — including 59 from DB plan sponsors and 27 from DC plan sponsors — only 39 said they were “very concerned;” 47 were “somewhat concerned.” Relatively few, however, are taking any dramatic measures to cope with the situation.

Of the DB players, only 19 said they planned to take any significant action. The most common proposed action was reducing the plan’s equities weighting or raising cash. Only three plan sponsors said they would be converting to a DC plan or closing off their DB plan in response to the crisis.

Hurst says there is an upside for plan sponsors. With credit markets tightening and interest rates eventually going up, the discount rate they use to value their pension obligations is increasing. That means their liabilities will decrease.

As for clients funding retirement on their own, history has shown that the markets will rebound and those returns will repay some of the deficit capital markets created in the first place. And when that happens, Forestell says, this period should be no more than a blip on most people’s portfolios. Those who will be hit hard, however, are those either in or near retirement, who have a high percentage of equities in their portfolios.

As a result, he says, some people may consider delaying retirement; retirees who have seen their savings depleted may consider going back to work. IE