Pension growth stalls: StatsCan

A downturn in the stock markets and a rising Canadian dollar are curtailing growth in employer-sponsored pension funds, Statistics Canada reports.

Growth in pension plans stalled in the third quarter of 2007. The market value of assets in these pension funds amounted to $957.2 billion for the three-month period ending September 2007, virtually unchanged from its $956.9 billion value in the second quarter.

StatsCan says the failure to grow reflects both the performance of stocks on the Toronto Stock Exchange and the rise in value of the Canadian dollar, which has hindered gains in foreign stock holdings. During the third quarter, the value of Canadian stocks declined 1.6% while foreign equity investments dropped 3% after currency conversion. According to StatsCan, pension fund assets held in stocks and equity funds account for 39.1% of their total assets.

Offsetting the declines in equity assets was moderate growth in bonds and real estate. The value of bonds rose 2.1% while the value of real estate assets increased 2.8%. At the end of September, pension fund assets in bonds and bond funds accounted for 32.0% of total assets while real estate represented 6.6%.

Pension revenues declined to $28.3 billion in the third quarter, after peaking in the previous quarter at $34.7 billion. StatsCan notes part of this decline was also due to reduced employer contributions. Contributions from employers were down following several large special payments made for unfunded liabilities by employers during the previous quarter.

In addition, StatsCan says expenditures rose 5.9% to $12.9 billion primarily due to losses on the sale of securities and restructuring costs. Pension benefits paid to retirees were $8.4 billion. Net income declined to $15.4 billion from a record high of $22.6 billion in the second quarter.

While growth was flat, the current stats could be even worse because equity markets have only deteriorated further since the third quarter of 2007. Zainul Ali, senior investment consultant with Towers Perrin, says there is little to worry about right now and that Canada’s corporate plans are quite healthy after having built up surpluses over four years of strong markets.

“This is just a function of the capital markets,” Ali says. “Most of the corporate plans are fairly well funded now. The fact that they didn’t put as much money in the plan during the third quarter was just a one quarter event.”

A prolonged downturn, though, could start to push some plans toward deficit situations, but Ali says that most plan sponsors have adjusted to the deficit crisis from the early part of this decade so that if equity markets hit a sustained downturn, funding problems shouldn’t be as severe.

“There were two big problems in the earlier part of the decade. You had bond yields declining and equity markets going down,” he says. “Three consecutive years of negative markets — it was referred to as a perfect storm.”

Ali says pension managers have ensured their bond assets can fund their liabilities, so when equities decline, which they invariably do, plan sponsors will be better prepared to fund the plans.

“A lot of pension funds have taken steps to manage their risk in terms of rates going down. They have been matching their bond assets with their liabilities much better now than they did seven or eight years ago,” he says. “If you’ve got a liability that’s maturing in 15 years’ time and you buy a bond that is maturing in fifteen years’ time, then you can just match it to that liability. We call it matching the duration of the liability. If you match the duration of your liabilities with the bonds, it doesn’t matter what interest rates are going to do; the two are going to move in lockstep.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com