“Dollars And Sense”: Pension Plans Regaining Their Health
David Christianson, CFP, R.F.P., TEP
Recently, a study showed that people who do not belong to a pension plan have to save money very aggressively to fund a comfortable retirement.
Obviously, though, a healthy pension plan that can fully meet its obligations is a pretty important part of the mix. For that reason, a lot of pension plan members are breathing easier this week as two separate studies suggest that Canadian pension plans are regaining their lost health.
Two leading pension consulting firms, Mercer Human Resource Consulting and Watson Wyatt Worldwide, released separate reports showing that Canadian pensions are at their healthiest level in five years.
Now, I don't like to say “I told you so” (actually, the truth is I love to say that, just seldom get a chance), but I suggested back in 2003, when panic about pension deficits was reaching a fever pitch, that a few years of solid stock market returns and extra funding by companies would work wonders for ailing pension plans. I suggested at the time that no one should panic.
Another big positive factor has been the rise in long-term interest rates, making it easier for these plans to fund their future obligations. The assumption used for long-term returns is likely the biggest determinant of whether or not the pension is fully funded.
Watson Wyatt found the ratio of plan assets to plan liabilities for the average plan climbed to 102% recently, up from 86% at the start of 2006. This is the highest level in five years.
Meanwhile, the Mercer Pension Health Index improved from 84% at the beginning of the year to 89% at the end of June, the highest level since the fall of 2004.
Plan administrators cannot become complacent, however. Costs are going up and a market correction or a drop in long-term bond rates could immediately put the average pension in an underfunded position. The biggest cost is providing pensions, obviously, and rising life expectancy is the biggest single contributor to the rising costs.
Actually, I'm okay with that one, as there's no point in a healthy pension plan, without healthy members to enjoy the fruits.
Another negative for pension plans is the amount of regulation and paperwork they require, which leads many small and medium-sized employers to forego pension plans in favor of simpler retirement funding methods. This means that fewer employees are covered by pension plans than in the past.
If you are a member of a pension plan, strive to understand how it works and what your expected benefits will be. Pay particular attention to early retirement penalties and portability features.
If you don't belong to a plan, get out your calculator and figure out how much you will have to save on your own to build up enough capital to provide your personal "pension." You will likely be shocked.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays in the Winnipeg Free Press. You can e-mail him at dchristianson@wellwest.ca