Office of the Superintendent of Financial Institutions
The recent market downturn and ongoing market volatility are strong reminders of the importance of being prepared for a wide range of potential shocks or adverse events. In PBSA Update 29 (June 2008), we noted the potential for changes in financial markets and economic conditions to adversely impact pension plans. We also encouraged administrators to understand their risk tolerances and to undertake scenario testing in order to help identify potential exposures and to take initiatives to manage risks prudently to safeguard pension benefits.
As part of its risk-based approach to supervision, OSFI also considers the effects of a range of market conditions on the federal private pension sector. One tool we use is the Estimated Solvency Ratio (ESR) testing that we conduct every six months, which showed at June 30, 2008 deterioration in the average solvency ratio of federal pension plans to 0.98. Since then, financial markets have experienced sharp declines and significant turbulence. If current market conditions continue, we can expect asset values for many plans to be severely eroded at year-end.
In this environment, it is essential that plan sponsors and administrators carefully consider the implications of the market downturn on their pension plans. Although market values used in solvency valuations will only be known at a pension plan’s year-end, particular issues for plans to consider now include:
As noted above, pension plan sponsors and administrators need to be prepared for the effects of the current market downturn. They should also continue to consider a range of longer-term scenarios, including the possibility of protracted market weakness, and think about possible responses that are consistent with their risk tolerance. We strongly encourage plan administrators and sponsors to use regular scenario testing as a risk management tool.
Please do not hesitate to contact your OSFI relationship manager to discuss your particular situation.