FSRA has posted its 2019 Report on the Funding of Defined Benefit Pension Plans in Ontario (Report).
FSRA regulates all pension plans registered in Ontario and as Canada’s largest pension regulator, is a trusted source for the pension industry. As part of FSRA’s efforts to deliver on our mandate to promote good administration of pension plans, and to protect and safeguard the pension benefits and rights of pension plan beneficiaries, this report provides pension stakeholders with funding, investment and actuarial information on the registered defined benefit (DB) pension plans we regulate.
Highlights of the Report include:
- The estimated median going-concern funded ratio has improved to 115% as at December 31, 2019 compared to 105% as at December 31, 2018;
- The estimated median solvency ratio increased to 98% as at December 31, 2019 versus 94% as at December 31, 2018;
- On May 1, 2018, a new funding framework for DB pension plans became effective. Currently, 759 plans (approximately 62% of plans) have transitioned to the 2018 funding regime, which required the funding of a reserve, called a Provision for Adverse Deviations (PfAD). The data shows that:
- The number of plans identifying themselves as closed and open for purposes of determining the PfAD are 584 and 175 respectively. The median PfAD for all these plans is 9.9%;
- There is a clear shift in the proportion of plans using higher going-concern interest rate assumptions under the 2018 funding regime compared to those under the previous regime, presumably in response to the inclusion of the PfAD. FSRA will continue to monitor these developments to detect emerging trends in order to understand their implications on benefit security and pension risk management.
- Historically, there is very little change year over year in the typical asset allocation of pension funds between fixed income and non-fixed income. However, the data this year did reveal some larger than usual changes. Single employer pension plans (SEPPs) and multiemployer pension plans (MEPPs) showed an increase in assets allocated to fixed income, while certain large jointly sponsored pension plans (“Listed JSPPs” – listed in subsection 1.3.1(3) of Regulation 909 and not required to fund on a solvency basis) lowered their fixed income allocation. There was a shift away from equity across the board, with allocation percentages decreasing by 4%-6%. Much of this appears to have gone towards real estate, which increased for all types of plans. Finally, the allocation to alternative investments, which had been in a rising trend, saw modest reversals for SEPPs and MEPPs, while increasing significantly for the Listed JSPPs;
- The number of SEPPs has decreased by 134 compared to the 2018 Report, mainly due to plan windups and asset transfers (e.g. plan mergers). Of note, the membership in all types of SEPPs has decreased whereas the membership in MEPPs and Listed JSPPs have increased. This is likely attributable to the significant reduction in the number SEPPs and the closure of DB provisions for some ongoing plans.
This Report covers the period to the end of 2019 (and ARs with a valuation date up to June 30, 2019). It does not reflect changes after December 31, 2019. The COVID-19 pandemic declared by the World Health Organization in March 2020 has resulted in an unprecedented shock to the global economy in modern times, with no clear indication of how long it will last or what the long-term impact will be.
In addition to an annual reporting, FSRA also monitors and reports on the estimated solvency position of pension plans on a quarterly basis. These updates reveal that the estimated median solvency ratio of pension plans fell significantly from 98% as at December 31, 2019 to 85% as at March 31, 2020, but that it partially recovered to 90% as at June 30, 2020. The equity markets have also strongly rebounded from their lows in March, even as the global economy remains partially restricted as world leaders try to contain the spread of the virus.
The economic disruptions have affected all pension plans to varying degrees. For plans whose transfer ratio decreased by 10% or more (and below 90%), the law requires the administrator to obtain FSRA’s consent before transferring out commuted values for members who terminate their membership in a pension plan. To assist plan administrators, FSRA issued the Guidance: Limitations on Commuted Value Transfers and Annuity Purchases (DB Pension Plans) with respect to their approach in reviewing these applications.
Businesses have reviewed their operational needs in light of the economic environment and FSRA expects that many pension plans will be filing “off-cycle” (i.e. voluntary) valuations with effective dates prior to March 2020 in order to stabilize and manage their funding requirements. The Report estimates that minimum required contributions for 2020 will be $17.4 billion, a decrease of about 4% from the 2019 level. However, this estimate is based on the last filed valuation reports. If many administrators file valuation reports that reflect the generally strong funded position of pension plans at the end of 2019, the actual required contributions for 2020 could be substantially less.
At FSRA, we remain vigilant in monitoring the situation as it develops. For pension plan administrators, it is paramount to understand the risks their plans are exposed to and to adjust as appropriate to manage those risks. FSRA is committed to continue engaging with plan sponsors and fiduciaries to collaboratively improve plan administration and benefit security for beneficiaries.