Public perception of a serious problem in the funding of defined benefit (DB) pension plans in both Canada and the United States is a myth for over 90% of plans according to Dominion Bond Rating Services (DBRS), Canada’s leading international rating agency.

Its study released this month entitled, Pension Plans: The Myth of a Pension Problem, reviewed the 2002 to 2006 results of 536 predominantly North American defined benefit pension plans. Of the plans reviewed the unfunded liability collectively amounted to only $55 billion (2.83 per cent), based on overall plan assets of $1.8 trillion.

According to the DBRS study, there are a number of myths and misconceptions relating to plan funding, including:

· Companies have been neglectful and haven’t been contributing to plans;

· Firms have used aggressive assumptions to make plans appear to be in a better state than their actual financial position;

· By not reporting pension plan funding on the balance sheet, companies were hiding their real obligations; and

· Companies are obligated to fund post-retirement benefits

The study states that 2006 represented a watershed year in the funded status of pension plans. Over 25% of plans reviewed are now considered overfunded while 70% are deemed well funded. “These figures display the rise from the lowly days of 2002, which represented the market-bottom, and 2005, which marked the low point of assumptions (expected rate of return on assets and discount rate).”

DBRS believes that the funded status of plans is likely to continue to improve in 2007, leading to an increased number of fully funded plans. “With few exceptions, pension funding deficiencies are becoming less of an issue. These forecasts can be attributed to three key factors:

-expected increases in interest rates and therefore discount rates;
-reasonable equity returns; and
-further employer adjustments to regulatory requirements.

Combined, these expectations should result in the elimination of pension deficiencies for North American companies over the next decade.”

The study also notes demographic factors since 2000 have had a large impact on funding of plans. “The trend is expected to continue and will pose new challenges for highly labour-intensive industries with strong unions, as baby boomers retire and a smaller pool of employees must support a larger number of retirees."

Source: NUPGE