Canadian pension plans saw their funding plummet in the first nine months of 2011 but the bleeding was stanched in the final quarter of the year.
Surveys by two pension consulting firms – both tracking hypothetical pension plans with typical investments – show pension funding fell by almost 15 percentage points throughout 2011, leaving plans facing a severe financing shortfall.
Towers Watson said its pension index fell to 72 per cent by the end of December from 86 per cent at the beginning of 2011, while Mercer said its index dropped to 60 per cent from 73 per cent at the start of the year. The index measures the proportion of assets held by the pension plan compared with its estimated pension liability.
Paul Forestell, senior partner at Mercer, said the only good news is that pension health remained flat in the fourth quarter as stock markets posted modest gains.
"I think that's the best you can say this year – it's the only quarter that didn't do any damage," he said.
Canada's benchmark S&P/TSX composite index fell 11 per cent in 2011, posting a decline of 13.5 per cent in the first nine months but recording a gain of 2.8 per cent in the final quarter.
Towers Watson said its model pension plan – with a typical asset mix of 60 per cent stocks and 40 per cent bonds – earned a meagre 0.5 per cent rate of return on its assets in 2011. But its financing was eroded by a 20-per-cent increase in the liability to pay pensions to members.
That's because pension liabilities are calculated based on long-term bond yields, which fell in 2011, driving funding costs far higher.
Both surveys look at the impact on pension plan health based solely on changes in interest rates and investment performance during the year. Real pension plans may have a different funded status because companies often add extra cash to their plans to make up shortfalls.
Nevertheless, the impact of the market turmoil means companies are facing sharply higher pension costs and growing obligations to put extra cash into their traditional defined-benefit (DB) pension plans, which pay a guaranteed level of income in retirement.
"DB plan sponsors will continue to feel the impact of the double whammy we experienced in 2011 – a combination of declining long-term interest rates and poor equity-market performance," Towers Watson pension consultant Ian Markham said.
"For many organizations, these conditions have resulted in larger plan deficits at the end of 2011 and will lead to higher pension costs in 2012 and beyond."
Many large companies announced plans to add extra cash to their pension plans in 2011 or to reorganize their plans to lower liabilities. Royal Bank of Canada, for example, said it will no longer allow new hires to join its traditional DB pension plan as of Jan. 1, while Air Canada faced labour turmoil in June over its plans to close its DB plans to new hires.
Canadian Pacific Railway Ltd. said in November it will borrow $500-million to inject more cash into its pension plan – the third such lump sum payment in three years. Phone giant BCE Inc. said it would make an extra $750-million payment to its pension plan in December.
"There was a fair bit of press in December around companies making special contributions … and they were big amounts," Mr. Forestell said.
"I think what they were doing is anticipating the results that we're seeing here. So it will be a cash drain again this year."