More federal pension plans underfunded, says OSFI

In the first six months of 2005 there was a “marked deterioration” in the average estimated solvency ratio of federal pension plans, according to the Office of the Superintendent of Financial Institutions (OSFI).

Canada’s primary regulator of financial institutions estimates the aggregate solvency deficit of all federal pension plans grew to $12 billion from $8 billion between December 2004 and June of this year.

In a statement, Julie Dickson, the assistant superintendent of the regulation sector for OSFI, described the situation as “stable but fragile.”

As many as 72% of federal defined pension plans are less than fully funded compared to just over half in December. At present, there are 83 pension plans on OSFI’s watch list — 50 defined benefit pension plans and 33 defined contribution plans — with more expected to be added in the coming months.

While Dickson concedes 72% is high and that “heightened vigilance” is warranted, she said it is important not to overreact since the average funding shortfall is less than 10%.

Based on OSFI’s’s latest calculations, Dickson said many defined benefit pension plans will need to prepare for higher solvency funding requirements in 2006.

The drop in solvency results is being blamed on two main factors. The main decrease is attributed to a change in actuarial methods introduced in February, which changed how solvency liabilities are calculated. This change made the calculation of these liabilities more sensitive to market interest rates. The low long-term interest rate environment dragged the average estimated solvency rate down even further.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(11/22/05)