Fears about a looming pension crisis have receded somewhat since last year, according to the Conference Board of Canada’s fourth annual survey of pension plan sponsors. Much of that that can be attributed to a year of good investment returns. Nevertheless, long-term affordability issues weigh on plan sponsors, particularly since there’s a $20 billion gap between what sponsors have promised employees and what they currently have on hand.

“We got rid of the fever, but we’ve still got the flu,” says Gilles Rhéaume, the Conference Board’s vice-president of public policy. He was speaking at a pension summit in Toronto on Thursday.

The chief concerns for pension plans are managing the volatility of pension expenses in the private sector, ensuring solvency in the public sector, coping with the current level of expense in the non-profit sector, and complying with incoming pension accounting rules that will require asset values to be marked to market rather smoothed over a three-year cycle.

Still, change is afoot.

Responding to a question he had earlier asked of a speaker, Ian Markham, director, pension innovation, Watson Wyatt Worldwide, noted that “if long bond yields go up” — an earlier speaker had suggested a long-term target of 6% — “everyone would be worried about what to do with their fund surpluses.”

But they’re not, even though on average, plans are 98% funded, up from 86% a year ago. They have achieved that level, however, through riskier assets, such as equities. An investment in long bonds over the past year would have seen the funded ratio rise only to 87%.

Nor do the results hold for all pension plans in Watson Wyatt’s sample. The top third of plans by size had a funded ratio of 95%. The next third had a funded ratio of 88%, while the smallest third had a funded ratio of 80%.

Markham doesn’t have an answer for this differences, but suggests larger plans may have seen a better rate of return, or that smaller plans have a higher proportion of unfunded supplemental employee retirement plans.

In total, the plans surveyed had an $11 billion unfunded liability. However, on the balance sheets is another $8 billion accrued benefit liability, making for a $20 billion gap. That represents 4% of shareholder equity. But the figure varies depending on the specific industry. In durable manufacturing, for example, benefit liabilities are 17% of shareholder equity, 14% in agriculture and forestiy and 12% in transportation and utilities.

Markham figures the markets have already discounted these liabilities in the stock price. Still, plans are looking for solutions. Some of bumped up their equity weightings wille others have increased or are planning to increase their exposure to alternative assets. Some are applying liability driven approaches, by matching the duration of assets to the maturity of liabilities.

The are also tinkering the plan structure, not just for new employees but for current employees as well. A third are considering converting to a DC plan or a Group RRSP, despite their belief that DB plans are more attractive for hiring and keeping highly skilled workers. About a fifth are increasing the required employee contributions, reducing benefit accrual rates, early retirement benefits and post-retirement health benefits.

Filed by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com

(05/11/07)