Two years ago we reported that the December 2007 average solvency ratio of federal plans was estimated at 1.05. In other words, pension plan assets, on average, exceeded liabilities by an estimated 5%. A year later, at year end 2008, the ratio had declined to 0.85, meaning that the market value of pension plan assets would have been sufficient to cover, on average, only 85% of promised benefits on plan termination—a significant reduction from 2007 to 2008. Our most recent estimates show that the average ratio has increased modestly to 0.90 at December 2009.
An indicator that has shown a more marked improvement is the proportion of materially underfunded plans. Based on OSFI's estimates, at the end of 2009, only 15% of all federally regulated pension plans had a solvency ratio of less than 0.80, whereas at the end of 2008 the comparable proportion was 40%.
A pension plan’s reported solvency ratio has a direct impact on the funding that the sponsor must contribute under federal funding regulations, which do not require defined benefit pension plans to be fully funded at all times, but where the ratio of assets to liabilities is less than one, the plan must make special payments to address the deficiency. The provinces and many other jurisdictions have similar rules. So while the most recent solvency testing results suggest an improving trend, many plan sponsors will still be required to make significant special payments, which may pose challenges for some plans.
OSFI's primary objective in estimating solvency ratios is to detect problems and challenges early so that we can, working together with the pension plans, take steps to safeguard members’ benefits where we feel they are at risk.
Solvency testing is a key element of OSFI's enhanced monitoring of federal pension plans. We use the results to identify underfunded pension plans and determine if the administrators of these pension plans are taking appropriate actions to deal with the situation. Where warranted, OSFI intervenes in a number of ways, ranging from encouraging plan sponsors to cease contribution holidays to requiring enhanced notification to members, to requesting early valuation reports.
Consistent with how we supervise financial institutions, OSFI takes a risk-based approach to supervising pension plans, tailoring our activities to the risk profile of our plans. Over the past two years we have identified those pension plans that have been most challenged by market conditions and have taken actions to protect the rights and interests of pension plan members and other beneficiaries.
While regulators such as OSFI have a role to play, under the terms of our legislation the primary responsibility for dealing with the challenges facing pension plans today rests with the pension plan administrators and sponsors. Therefore, effective plan governance is critically important to controlling risks. So a key focus of OSFI's supervision is to assess the quality of a pension plan’s governance.
OSFI regularly reminds plan administrators to be prepared for a wide range of potential shocks or adverse events and to use regular scenario or stress testing as a risk management tool. We believe regular scenario testing will help plan administrators to understand and prepare for the risks they face.
Given the current economic environment and the resulting impact on the health of Canadians’ pension plans, it is more important than ever for governments, regulators, and pension plan administrators to work together to meet the challenges currently facing private pension plans.
Thank you for listening. I would be happy to take any questions you might have.