Press Releases

More uncertainty is in store for 2009

Toronto, November 14, 2008 – The current financial crisis is creating extreme uncertainty and potentially huge increases in 2009 contribution requirements for Canadian sponsors of defined benefit plans, according to a recent analysis conducted by Watson Wyatt Worldwide, a leading global consulting firm.

Since August 2008, the solvency position of the typical pension plan in Canada has worsened considerably, driven primarily by decreases in asset values. As a result, many plan sponsors will have to make much higher contributions in 2009 to fund the additional deficiencies, which are generally required to be funded over five years.

“There’s a great deal of uncertainty about how quickly financial markets will recover and whether governments will provide at least temporary relief from 2009 solvency funding requirements,” said Doug Chandler, senior retirement consultant at Watson Wyatt. “It all adds up to a big question mark about how much cash plan sponsors will be contributing to their pension plans in 2009.”

“We urge governments across the country to provide temporary relief to employers from potentially large, unexpected contributions to their pension plans at a time when they can least afford it,” said David Burke, retirement practice director of Watson Wyatt’s Canadian offices. “Extended amortization periods for funding solvency deficits are important at this time. The best form of benefit security for plan members is a strong employer.”

Solvency valuations may generate unacceptable levels of contribution*

 

Protective Strategies Remain Important

Given the large decline in equity markets and the continuing credit crisis, it is not surprising to find that the solvency ratio of a plan invested in 60 percent equities and 40 percent bonds has declined rapidly over the last five months. More conservatively invested plans have likely fared better.

"Pension plans have not been rewarded for investing in equities, and in fact have seen their returns for the past few years eroded over the September–October 2008 period" commented Janet Rabovsky, investment practice leader in Watson Wyatt’s Toronto office. “Even conservatively invested pension plans have experienced significant deteriorations in their solvency funded position, leading many to revisit the question of risk and return – what is an acceptable compromise.”

Less Impact on Company’s Financial Statements

The story is quite different for companies’ annual reports, where high-quality corporate bonds are used to determine pension liabilities. Higher yields on corporate bonds significantly reduce these liabilities, largely offsetting the fall in the market value of pension assets.

Pension Funded Ratios Continue to be Volatile for Financial Statements***

 

Watson Wyatt analysis indicates the funded status of a typical pension plan for financial statement purposes has actually increased 2 to 4 percentage points this year (through October 31, 2008), unlike the solvency picture used to determine cash contributions. "The disparity between the rapidly decreasing funded status for contribution purposes and the increasing funded status for financial disclosure purposes really shows the potential issues with mark to market accounting and funding in the current market. Relief on funding requirements will be critical for plan sponsors unless the markets improve significantly," Burke noted.

About Watson Wyatt Worldwide
Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the world’s leading organisations on people and financial issues. The firm’s global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,200 associates in 32 countries and is located on the web at www.watsonwyatt.com/canada.