Canadian Multi-Employer Pensions Fall from Fully Funded in Q4

Funded level of Segal Group model falls to 95% from 102%.

The funded status of Canadian multi-employer pension plans fell below fully funded in the fourth quarter of 2018, declining to 95% from102% the previous quarter, according to consulting firm The Segal Group. The funding decline was a result of assets decreasing 4% combined with liabilities increasing 3% during the quarter.

Much of the funding drop was attributed to poor performance from equity markets during the quarter, which was also marked by high daily volatility. Canadian equities were led lower by falling energy and financial sectors.

Canadian oil prices also fell sharply due to transportation constraints, reflecting the federal government’s decades-long inability to build pipelines, said the firm. Meanwhile, the US equity market also had a negative quarter, which was fueled by investors’ concerns over a lack of a resolution to the trade war with China.

Additionally, Segal said the US Federal Reserve’s fiscal stimulus is fading, and cautioned that the likelihood of further meaningful fiscal stimulus prior to the 2020 presidential election is “significantly reduced” with the Democrats winning the US House of Representatives in the midterm elections.

International equity markets also had a poor result during the fourth quarter, with the lone bright spot being the Canadian fixed income market, which had a positive quarter.

Segal also said that the benchmark discount rate used to develop the firm’s model multi-employer pension plan’s liabilities decreased by approximately 11 basis points during the last quarter of 2018. However, this was still at a higher level compared to the fourth quarter of 2017. The result of the decrease was an approximate 3% increase in the model plan’s liabilities compared to the third quarter.

While the allocation for the model’s plan is 55% equities and 45% bonds, Segal said the benchmark discount rate varies based on the asset mix of a plan. A plan with a higher equity allocation would have had a higher benchmark discount rate, while a plan with a lower equity allocation would have had a lower benchmark discount rate.

Compared to the fourth quarter of the previous year, there was an increase in actual hours worked for all industries combined and in each industry, except in manufacturing, and wholesale and retail trade. According to Segal, a change in the hours worked can affect the cost of a plan as a reduction in the hours worked will hurt a plan’s ability to cover fixed costs. It said this risk is magnified when a plan is dependent upon future contributions to pay down its unfunded benefit obligations.

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