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Pension plan insolvencies on the decline

Published:Monday | August 6, 2018 | 12:00 AMAvia Collinder/ Business Reporter
Everton McFarlane, executive director of the Financial Services Commission.

New data indicate some measure of success in the rehabilitation of insolvent pension schemes.

At the end of last year, insolvent schemes represented seven per cent of active pension plans, and accounted for 1.07 per cent of the pension assets under management in the private market, said the Financial Services Commission, regulator of the non-banking financial sector.

By the Financial Gleaner's estimate, that would amount to pension assets of $5.65 billion being at risk, based on the pension market's overall value of $528.3 billion at the time. It's a striking improvement relative to the September 2017 quarter when insolvents accounted for 2.18 per cent of industry assets - amounting to $11 billion of the $513 billion market.

As outlined by the commission, the main reasons contributing to plan insolvency are "late or outstanding contributions, rates credited to members' account (in the case of Defined Contribution plans) being higher than the net yield of the plan, and sponsors not contributing at the required or recommended rate."

The FSC said that in cases where the plans are insolvent, trustees are required to submit a funding and solvency recovery plan, which is prepared with the assistance of the plans' actuary.

"The FSC monitors these plans closely to ensure that the aforementioned plan is adhered to," the watchdog told the Financial Gleaner.

Pension assets hit a new record high in March of this year, at $534.59 billion. Some 382 plans, representing 96 per cent of the 396 active plans. Of the plans submitted only six per cent did not pass the solvency test, indicating further improvement.

A pension plan is deemed insolvent when its liabilities exceed fund assets. For example, if an existing fund has $100 million in liabilities and $75 million in assets, it is insolvent by $25 million.

The FSC states that in the case of active Defined Benefit pension schemes, the sponsors have an obligation to fund the shortfall.




Meanwhile, FSC said in its quarterly report that winding-up proceedings were under way for three funds, but the reasons were not specifically stated. As to the health of pension investment portfolios, the regulator said on a note of caution that foreign currency denominated assets now represents approximately 10 per cent of invested pension assets.

"The exposure of pension assets to foreign currency risk continues to exist and trustees and investment managers are being encouraged to implement portfolio strategies that will effectively mitigate this type of risk," the agency said.