Ontario’s pension regulator says rising stock markets and rising interest rates mean the province’s plans are in their best shape since the financial crisis of 2008-09.
The Financial Services Regulatory Authority (FSRA) of Ontario says it estimates 81 per cent of plans have a funding ratio of 100 per cent or more. Just 2 per cent have a ratio below 85 per cent, which has been a minimum-funding standard in Ontario since 2018.
The funding ratio compares the value of the plan’s assets with the estimated long-term liability for providing pensions to members.
The median projected ratio was 110 per cent at Dec. 31, up from 98 per cent at the end of 2020 and about 85 per cent during the market trauma of the early days of the COVID-19 pandemic in March, 2020, FSRA said.
That median ratio is now at its highest level since monitoring began in 2009, and is likely higher than in the many years before that, said Lester Wong, FSRA’s chief actuary.
“It’s a tremendous improvement since the lows of the pandemic,” Mr. Wong said. “I don’t think people would have expected way back when the pandemic started that it would have improved so much.”
At the end of 2020, FSRA estimated 13 per cent of plans were below the 85-per-cent threshold.
The report covers 980 plans, with a total of $170-billion in assets, that are part of the province’s insurance fund that protects pension members in case of a plan failure. The fund does not include some huge public pensions and a handful of private-sector plans.
The data are in line with private-sector consultants who said last month they believed Canadian pensions had continued their rapid rebound. However, FSRA’s views are important because it’s the regulator that maintains the pension-insurance fund. FSRA is a relatively new agency that inherited the pensions-regulation task from the now-defunct Financial Services Commission of Ontario.
The FSRA numbers are estimates: Well-funded plans only need to submit formal valuations once every three years. With many plans using calendar years, the bulk of FSRA’s data is from Dec. 31, 2020, or earlier. FSRA used the investment allocations previously submitted by the plans, coupled with returns for major stock and bond indexes and other assumptions, to make its estimates of plan health.
Those signs suggest the improvement. Canadian and global stock indexes were up by double-digit amounts in 2021. And while bond returns were underwhelming, rising interest rates benefit pension plans: The estimate of a plan’s future liabilities shrinks when interest rates rise.
Companies with Ontario employees pay insurance premiums to support the province’s pension benefits guarantee fund, which pays a portion of unfunded pension benefits when an employer becomes insolvent. The maximum guarantee for a pensioner is $1,500 a month.
In 2018, the provincial government made changes to pension funding rules, which previously required pension plans to have a solvency ratio of 100 per cent, or else make extra payments to push their pensions back to that level. The 2018 changes dropped that minimum funding ratio to 85 per cent.
An underfunded plan is allowed to make up the difference over five years through gradual catch-up payments. With the 2018 changes, if a plan is considered underfunded, it only needs to develop a schedule to get back up to 85 per cent, not 100 per cent.
Michael Powell, president of the Canadian Federation of Pensioners, said his group estimated companies received a long-term benefit of $4-billion from the lowered funding ratio – money, he said, that could have been used to lift the cap and guarantee 100 per cent of pensions.
Mr. Wong says FSRA will “provide guidance and encouragement to plan sponsors and administrators and their advisers to undertake good governance and good risk management to try to understand how future changes in economic scenarios and situations might affect the plans, and take steps to make sure they protect the good positions that the plans are in.”
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