Sunday 9 August 2009

DBRS says Defined Benefit Pension Plans not Doing Badly

With all the news about the woes of pension plans at Nortel and GM, it is encouraging that debt rating agency DBRS concludes in its August 2009 report Canadian Private Pension Plans - Losing or Cruising? that the state of DB plans in Canada is reasonable:
"From the review of the major private pension plans in Canada, there are three main conclusions that stand out:
• The outlook for pension plan funding remains manageable.
• Pension challenges are not expected to lead to rating events.
• The shift from defined-benefit plans to defined-contribution plans will continue."

DBRS includes metrics of 70 large private sector plans, so one can see varying asset mixes, past returns and funding gaps (see App.5), which is useful both for the investor and for plan member employees of those companies. Though the average is ok, I would be worried about Canadian Oil Sands Trust (42.7% under-funded) and Nexen (42.3% under-funded). Employees and shareholders of Bank of Nova Scotia (25.4% over-funded) and Great West Life (9.0% over-funded) need not worry about pension obligations.

Also of note,
Widely varying asset mixes
  • equity averages 51% of pension plan assets but is as much as 68% (Canadian Oil Sands Trust) or as low as 16% (Sears Canada, which might seem conservative but what does Sears' 34% of "Other" consist of - Hedge funds?)
  • fixed income averages 43% of assets and "other", defined mainly as real estate, averages 6%; the portion of fixed income has been rising
Return Assumptions Declining
  • now averaging 7.1% for all plans, return assumptions have been trending downwards over the past decade due to greater fixed income, falling interest rates and lower equity returns. They are now 0.5% lower than in 2002.

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