Good afternoon and thank you for inviting me here today to contribute to the Finance Committee’s study of the Retirement Income Security of Canadians.
The Office of the Superintendent of Financial Institutions (OSFI) is the primary regulator of banks and insurance companies, as well as private pension plans that fall under federal jurisdiction. Federal pension plans represent about 7% of all private pension plans in Canada, and about 12% of total pension assets. The bulk of private pension plans in Canada are regulated at the provincial level.
Today I will provide an update on the current pension environment as OSFI sees it, and briefly describe some of OSFI's tools for monitoring the status of federal pension plans.
Everyone is likely aware that pension plans have been significantly affected by the financial and economic turmoil of the past few years. Pension plan assets were eroded by the stock market decline that began in autumn 2008, while pension liabilities have increased due to extremely low and declining long-term interest rates. At the same time, the economic slowdown has meant that many sponsors have not been well positioned to provide increased funding.
While there are some signs that the economy is strengthening, private pension plans will continue to face challenges. Unfortunately, the strong investment returns that pension plans earned in 2009 have been offset to some degree by the effects of the very low interest rates on plan solvency liabilities.
These trends are perhaps best illustrated in OSFI's solvency testing results. A pension plan’s solvency ratio is the ratio of plan assets to liabilities. Solvency valuations are actuarial calculations that use assumptions based on the pension plan being terminated and the assets used to pay promised benefits. They approximate how plan members would fare if their plan terminated at the valuation date.
OSFI estimates solvency ratios for federal pension plans every six months to provide a snapshot of the financial health of the defined benefit plans that we regulate. We monitor how the average ratio changes over time, as well as the proportion of plans that are significantly underfunded.