Will Companies Offload Pension Risk?
Defined-benefit pension plans faced financial declines in the second quarter, hurt by low long-term interest rates and volatile markets, say two studies by pension consulting firms.
Mercer and the Towers Watson both said Wednesday that companies need to find strategies to take away some of the risk from their defined-benefit pension plans.
"The solvency position of most Canadian pension plans declined sharply in the second quarter of 2012 on the back of weak equity markets and a significant drop in long-term federal bond yields," Mercer said in a news release.
The Mercer Pension Health Index stands at 77 per cent on June 30, down five per cent over the quarter.
Towers Watson said the combined effects of poor investment returns and decreasing interest rates caused its DB Pension Index to fall 1.4 per cent.
"Based on other data collected by Towers Watson on the funded status of Canadian DB plans, this would mean that the typical plan, which was roughly 85 per cent funded at the start of 2012, is likely in no better shape at mid-year," the pension consulting firm said.
Towers Watson said solutions to reduce risk are wide ranging from investment strategy shifts to the way the plans are designed to a complete sell-off of the risk.
Mercer said while many plan sponsors find it too expensive to take action in the short-term and a longer-term strategy is needed.
"Companies need to measure the risks they face and develop comprehensive strategies to take some risk off the table," said Manuel Monteiro, partner in Mercer's Financial Strategy Group.
"Recent developments like General Motors' plan to purchase $26 billion of annuities in the U.S. could change the insurance market landscape in Canada over the next few years, making risk transfer strategies possible even for some of the largest corporate plans in Canada," Monteiro said.